As a CERTIFIED FINANCIAL PLANNER™, I'm aware that there are plenty of tropes around what people believe us in the finance industry work on and think about. Things like stock, ETFs, bonds, and mutual funds come to mind for many people. Without a doubt, those are great examples of things that we work on and think about every day. However, we also plan and work with things that may seem odd!
For example, being a financial coach, I work with people in all aspects of life! I help people plan for the best and worst of times so that people can be as happy and as well taken care of as possible when they're enjoying life and when they're just getting through it. Property rights is another issue that I commonly work with, that may surprise people!
I know, I know - you're probably thinking, "Property rights? What does that have to do at all with financial planning and financial coaches?" It's definitely sort of an oddball category of things to deal with in the finance industry; however, people care a lot about their property! They want to grow it, protect it, and keep it safe. That's one of the reasons we're going to bring some awareness to a type of property that many people are unaware of today!
The Basics - What Does Community Property Mean?
Community property is one type of property that many of us live our lives completely unaware of, at least until we need to know about it. We accumulate different objects, things, and possessions throughout our lives, either through purchase, inheritance, or gifting. We tend to think of all of the stuff we accumulate strictly as our own, at least until we eventually have a family to share them with. Once in a relationship, it feels as if our things are in a quagmire of possession - they're mostly ours, but they're sort of someone else's as well. However, when we get married or have children, we tend to consider most possessions as "ours" instead of "mine."
This is intuitive to most of us - and the strange world of possession feels like it's an abstract one. But eventually, possession must be defined, and in the eyes of the law, "what's yours is yours, and what's mine is mine" may not be enough.
This is sort of where community property enters the picture. According to The Balance, community property is "a type of joint ownership of assets between married couples. With some variation by state, it means all assets purchased or acquired by a couple during their marriage are owned equally by them." In other words, our intuition is somewhat correct! In community property states, the things we own before we are married stay mostly ours, while the items we purchase during the marriage become community property of the marriage.
This all becomes very important in extenuating circumstances like divorce or death. While it's pleasant during good times to think of the things we own being shared with the people we love, that also means that when the marriage ends for one reason or another - the property may be divided between partners (even if you don't want it to be).
Can You Have Community Property Everywhere? (Which States Have Community Property?)
While some of you, especially the attorneys or lawyers who may be reading this, are probably rolling your eyes and saying, "tell us something we don't know," this may be new information to many of us. It could also be somewhat worrying. Most of us must take no marriage class or exam that informs us of property issues that may arise before, during, and after marriage. Community property could have a significant impact on us and our possessions. So it's no wonder many people are really concerned once they learn about it!
However, there's not necessarily a reason to be totally freaked out, at least not until you learn if community property even applies to you. Because of the nature of community property, some love it, and some despise it. This works its way through basically the whole of our community and certainly applies to lawmakers as well.
According to Quicken Loans, nine states are community property states, "Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, any assets acquired by spouses throughout their marriage is labeled as community property, regardless of who buys it.".
A few states are also in a gray area of sorts. For example, in Alaska, you must opt-in to community property, and in Tennessee, community property may be established by creating a community property trust between spouses.
However, even if you live in a community property state, that doesn't necessarily mean that your property is automatically shared between you and your partner. California, Washington, and Nevada are the only states (as of 2022) that include domestic partnerships in their community property laws. Of course, even in situations that seem cut and dry, there are exceptions to the rule.
What "Counts" as Community Property?
Now that we've learned all about community property, the next logical question to answer is, "What COUNTS as community property?". Unfortunately, this question can get a little hairy. The answer will vary from state to state because community property isn't outlined or defined by the federal government. However, generally speaking, anything purchased or shared during marriage in a community property state will" count." This includes (but isn't limited to): everyday purchases, larger purchases such as a house or car, investments and bank accounts, and even income earned throughout marriage (AKA savings).
What generally may not count (however, this also depends on the state you're living in) are things like gifts to a specific spouse, property primarily utilized by one spouse, inherited assets, or belongings acquired before the date of marriage, according to Investopedia. Unfortunately, community property doesn't only count towards good things, like assets. Community property may also be applied to liability and debt accrued during a marriage.
Common Law Property VS Community Property
The Yin to community property's Yang is referred to as Common Law Property. In most instances, Common Law Property will be the applicable ruleset because it's what's adopted by most states. In Common Law Property States, your spouse or partner is not necessarily entitled to your belongings even if they've purchased or acquired through the course of your marriage. This gets a little more confused during divorce proceedings, as it requires more time, proof, and energy to outline precisely what belongs to who. It can also be devastating in the wake of tragedy. Because each spouse is understood to be a different entity in a community property law state. After one spouse dies, the surviving spouse must be "given" possession of the property through mediums like a will.
The Low Down on Community Property
It's difficult to say what's better regarding property law, which may be a contributing factor as to why states seem to be split on the issue. Each version of property law during a marriage appears to come with pros and cons, which depend on the situation you're in and the state whose laws pave the course for our actions.
However, one thing can be stated for certain: all of this can be very confusing. Community property or common property may sound similar, but they couldn't be more different in practice when divvying out property during separation, divorce, or death.
If you're interested in learning more about community property or common property and want to gain the tools necessary to move forward and create contingency plans for your assets, debts, and possessions – I'd recommend meeting with a financial advisor. Make learning about the laws surrounding marital property a breeze, and please call or email to schedule an appointment with me.
Together, we can create a financial plan that takes all of your property into account!
Until next time...this is Melissa Making Cents!
Melissa Anne Cox, CERTIFIED FINANCIAL PLANNER™, is a College Planning and Student Loan Advisor and Financial Coach in Dallas, Texas.