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What Does ‘Community Property’ Mean?

Community property refers to property acquired by one or both spouses during the marriage, provided the spouses live in a state that has a community property framework, says The Milwaukee Business Journal’s recent article entitled “Is what’s mine, ours? Understanding community property.”

There are not many community property states. That is because most states have adopted common law of property laws. The only community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Several other states’ laws allow residents to “opt-in” to a community property regime. These states are Alaska, Tennessee, Kentucky and Florida.

While community property laws in the nine community property states differ in a number of ways, they all classify property either as community property—which is owned one-half by each spouse, or separate property, that which is solely owned by one spouse.

For example, in Wisconsin, community property is referred to as “marital property” and separate property is referred to as “individual property.” Property acquired prior to the marriage and gifts/inheritances are typically classified as separate property. Any property acquired during the marriage is deemed to be community property. In a common law property regime, property is owned by the spouse whose name is on the title.

A basic feature of a community property legal framework is that title does not indicate ownership. Therefore, if a married couple deposits income earned during their marriage into an account titled only in the husband’s name, it is still owned one-half by the wife despite the fact that her name is not on the account.

Whether assets are classified as community property or separate property can have a significant effect on a couple’s life, including issues in estate planning, income and estate tax planning and creditors’ rights.

As far as estate planning, each spouse can only dispose of one-half of community property at his or her death. Community property also gets a “double step up in basis,” which means that built-in appreciation on community property is eliminated at both spouse’s deaths. Finally, the classification of an asset as community or separate property can affect whether a creditor of one spouse can recover from that asset.

Ask an experienced estate planning attorney about how community property laws may affect your financial and estate planning.

Reference: Milwaukee Business Journal (Jan. 1, 2022) “Is what’s mine, ours? Understanding community property”

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