Seven years ago Elder Law Issues briefly explained the concept of “community property” applied in Arizona and a handful of other states. Judging from the questions we get asked, it must be time to revisit the topic.

The community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) may have some differences in their approaches, but they are generally similar. All property acquired during marriage is presumed to belong to the marital community, and for most purposes that means each spouse will own an equal half interest. Alaska, incidentally, is sometimes included as a "community property" state, though its version only applies in certain out-of-state trust circumstances.

On divorce, community property will usually be split equally. Note that pretty much the same thing happens in the states where community property rules do not apply; the so-called “common law” states get to the same result by awarding each spouse an interest in much of the other’s separate property.

The presumption of community property is only a presumption, and it can be overcome if one spouse can show that:

     -- the property belonged to him or her before the marriage, or

     -- it was received by him or her as a gift or inheritance, or

     -- the couple agreed that the property would be separately owned.

It is difficult to overcome the presumption of community property, but it is not impossible. An inheritance (or gift) from one’s parents, for instance, does not create any rights in one’s spouse, and the gift remains the recipient’s separate property (along with any increase in its value) despite the passage of time.

It is easy for a married couple to turn separate property into community property. This might happen by putting the non-owner spouse’s name on the title, or by transferring the property to a joint trust that indicates everything is community property. It is also possible to create a community property interest in something that would otherwise be separate property—as, for instance, if mortgage payments are made on a home brought into the marriage by one spouse. In such a case the other spouse might not own a half interest, but might have acquired a fractional interest representing the contribution from community income (the couple’s salaries).

For tax purposes it is probably good that assets are (or become) community property. That is because the tax basis (for income tax purposes) receives a complete step-up to the fair market value as of the date of death of either spouse. In the event of a divorce, however, converting separate property into community property will have the effect of giving the non-owner spouse an interest that he or she would not otherwise be entitled to receive.

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