Community property

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Community property is a marital property regime that originated in civil law jurisdictions, and is now also found in some common law jurisdictions.

In a community property jurisdiction, most property acquired during the marriage (except for gifts or inheritances) is owned jointly by both spouses and is divided upon divorce, annulment or death. Joint ownership is automatically presumed by law in the absence of specific evidence that would point to a contrary conclusion for a particular piece of property. The community property system is usually justified by the idea that such joint ownership recognizes the theoretically equal contributions of both spouses to the creation and operation of the family unit.

Division of community property may take place by item, by splitting all items or by value. In some jurisdictions, such as California, a 50/50 division of community property is mandated by law; in others, such as Texas, a divorce court may decree an "equitable distribution" of community property, which may result in an unequal division of such. In non-community property states property may be divided by equitable distribution. Generally speaking, the property that each partner brings into the marriage or receives by gift, bequest or devise during marriage is called separate property. See division of property.

[edit] Jurisdictions

In the United States there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Community property has certain federal tax implications, which the Internal Revenue Service discusses in its Publication 555. In general, community property may result in lower federal capital gain taxes after the death of one spouse when the surviving spouse then sells the property. Some states have created a newer form of community property, called "community property with right of survivorship." This form of holding title has some similarities to joint tenancy with right of survivorship. The rules and effect of holding title as community property (or an another form of concurrent ownership) vary from state to state. Consumers who are considering how to hold property should either research primary source materials carefully, or consult with a lawyer or Certified Public Accountant.

[edit] Issues

Often a new couple acquires a family residence. If the marriage separates in subsequent years, there can be difficult community property problems to solve. For instance, often there is a contribution of separate property; or legal title may be held in the name of one party and not the other. Occasionally there will have been an inheritance during the marriage, whose proceeds were used to paydown a mortgage. There is case law and there are applicable formulas to apply for nearly all of these situations, to determine and divide community and separate property property interest in such a residence.

Community property issues arise in divorce and probate matters. Property acquired before marriage is separate and belongs to the spouse who acquired it. Property acquired during marriage is presumed to belong to the community estate except if acquired by gift, or by exchange with separate property. This definition leads to numerous issues that can be difficult to ascertain. For instance, where a spouse owns a business when marrying, it is clearly separate at that time. But if the business grows during the marriage, then what of the additional property acquired during marriage? Do they not result from labor of the spouses?

A pension or annuity may have first been acquired before a marriage. But if contributions are made with community property during marriage, then proceeds are partly separate property and partly community property. Upon divorce or death of a party to the marriage, there are rules for apportionment.

Stock options are also difficult to ascertain. A stock option is a right to purchase shares of a company at a fixed price. Companies with growth potential sometimes award stock options as compensation to employees, during times when there is not enough money to pay a suitable salary. By accepting a stock option for compensation, an employee invests his or her own trust in the belief that he or she will help make the company acquire a higher value. Thereafter, the employee works and contributes value to the company. If the company later acquires a higher share valuation, then the employee may "cash in" his options by selling them at the fair market value. The employee's trust in this future value motivates his work without immediate compensation. That effort has value. If the marriage is terminated before the shares are cashed in, then the parties must decide how to apportion the community property portion of the options. This can be difficult. Case law precedents are not yet available for all situations involving stock options.