Ever wondered how asset ownership works after marriage, to be more specific, during separation?
Witnessing multiple celebrity separations, have you ever wondered what happens to their assets or the basis on which they are split? All those high-profile separations with ample assets are now meant to be divided. But how do they determine which spouse receives which asset? Even though most of us might not be in a similar situation(thankfully) or may not have as many assets, knowing what we’re entitled to is quite a necessity in today’s fast-paced world.
Asset ownership is something we all must be aware of to be capable of estate planning in a suitable manner.
With this article, we intend to help you understand some of it in detail. When one is married or going through a divorce, there’s one major factor to consider when juggling assets. Having said that, it’s beneficial to primarily know-how assets for a married individual can be classified as, i.e., community property and separate property.
Community Property vs. Separate Property
Just in case things ever go haywire, you wouldn't want to be clueless about your assets. Therefore, it is crucial to know which estates are entitled to your sole ownership and which aren’t. Estates are mainly categorized as community or separate property in the context of domestic relationships.
Community property specifies a married individual’s assets. Any property that's been purchased or acquired during a marriage is labeled as community property. It is also often referred to as marital property, owing to what the term implies. Community property does not incorporate gifts and inheritances one receives. They are not conditioned for division and are treated as separate property.
Separate property is owned by one spouse and is usually purchases made before marriage. Separate and community property are two different ways of classifying property in a marriage, as they have different implications for estate planning, taxation, and divorce.
Difference Between Community Property and Separate Property in Tabular Form
|Parameters||Community Property||Separate property|
|Classification of assets||Any property obtained during a marriage||Property owned before marriage|
|Examples||Income, housing investment, salaries, etc.||Inheritance, properties acquired in only one’s name before marriage|
|Taxation||Both partners report 50% of community income on their tax return||The sole owner reports 100% of their individual income on their tax return|
|Planning considerations||Each spouse legally receives the exact half of all the communal property in case of separation.||Separate property is not bound to be divisible in case of a separation.|
What Is Community Property?
Any asset acquired during a marriage can be considered community property. Regardless of whose name those assets were bought in, they’re bound to be divided equally amongst the partners in case of separation (divorce, annulment, etc.). Community property systems can be found in countries like Germany, France, Italy, Sweden, South Africa, and America. However, it is prominent in the following states located in the US, namely - California, Arizona, Nevada, Louisiana, Idaho, New Mexico, Washington, Texas, and Wisconsin.
Income, wages, or bonuses earned by either of the partners; purchase of any estate; any rents, interests, or dividends; stock investments; any venture funded with community property; vehicles or other materialistic acquisitions; retirement plans with contributions made by both partners during the course of their marriage; if their residential estate, was bought during the marriage; debts, etc. are classified as community property.
For instance, a married couple purchases a new house, and only one spouse contributes to its purchase or one of them contributes more than the other. Even in such cases, that house will still be recognized as a community property and will be split equally among the couple.
Gifts and inheritance by any one of the spouses do not fall under this term. There is a better and more detailed way to understand this concept by diving into its variations, depending on a variety of factors.
Variations and examples of community property
- Quasi-community property: It is utterly common in California. Any property that either of the spouses acquired during marriage while residing out of state. Those assets would have counted as community property if they would have been obtained in California. Income earned, real estate, or even vehicles purchased while living in another state are counted as quasi-community property. However, quasi-community property is still deemed community property and is bound to be equally allocated among the partners in California. In short, any asset acquired while domiciling in a state of separate property.
- Community of Acquests and Gains: From this perspective, each partner has half ownership over all the assets obtained during a marriage. Gifts and inheritances are excluded from this list along with separate property, about which we will get to know more further in this article.
- Profit and Loss: Any debt that you and your spouse acquire during a marriage is referred to as community debt. Similar to how community property is meant for an equitable division, so is community debt. In case of exceptions, an equal and just division does not always refer to a 50/50 split after careful consultation with a lawyer. Apart from gains and acquisitions, liabilities and debts in such cases are examined separately.
- Absolute community property: In case there is some property acquired by a spouse from a previous marriage, it is set aside for the protection of successors (if any) from that marriage.
- In case of one spouse’s demise, one-half of the entire community property is subject to federal estate tax, along with the entire separate property of the deceased.
What Is Separate Property?
Assets purchased by either of the spouses before they were in the union of marriage are categorized as separate property. These assets can range from anything to real estate to stocks or shares in a company, a business, etc. Each partner is entitled to the sole ownership of every independent property they own. Gifts or inheritances received by a partner are tallied as Separate property, regardless of whether they were secured before or during the marriage. Separate property is not entitled to division amongst the spouses in case of separation. For instance, a house, vehicle, etc., acquired by one before marriage completely remains their own. Assets purchased after the date of separation are also one’s property. Separate property is often referred to as self-acquired property owing to its meaning.
Variations and examples of separate property
- Any real estate, stocks or shares, vehicles, or any other materialistic acquisition by a spouse before marriage remains under their sole ownership even after
- Income, rents, or dividends derived from separate property also fall under the same category. The other partner does not have any rights over it.
- Commingling separate property is a term used to define a property that has changed into a community property from being a separate one. For instance, in a bank account solely yours before marriage, you start depositing your and your partner’s salaries or wages in that particular account. But when faced with separation, it is difficult for the judiciary to distinguish which money belongs to whom. In such cases, Separate property turns into community property if the court fails to identify which is which and is entitled to be equally divided between the partners.
- Acquired property in the form of inheritance by one partner in marriage is only entitled to them before, during, and after marriage.
- Any venture funded by the separate property of a spouse remains under their ownership and is not bound to be divided.
- At the event of one spouse’s death, their separate property is conditional to federal estate tax. The separate property of the surviving partner remains unbothered.
- Spouses can enter into an agreement regarding the nature of separate and community in cases where a spouse wishes to change the status of a community property into a Separate property.
Key Differences Between Community and Separate Property in Points
Now that we’ve had an in-depth learning of community and separate property let's understand some of the fundamental disparities between the two.
- The first and foremost difference is the classification based on the classification of assets. Community property involves assets that a couple acquired during a marriage, being allocated equally to both partners in case of a legal separation, regardless of who bought them. On the other hand, separate property are the assets that a married individual had acquired before they got married and are under the sole ownership of that individual. Furthermore, separate property remains one’s own, even when obtained after marriage or even separation, for that matter. The other spouse is not entitled to any rights over the separate property of the other one.
- Community property includes income, salaries or wages, real estate, and any materialistic belongings like vehicles, shares or stocks, etc. Separate property, on the contrary, comprises gifts and inheritances regardless of when they were obtained (i.e., before or after marriage and before or after separation) that remain under their ownership.
- Another crucial difference is tax reporting. When it comes to community property, if they file separately, each partner needs to report 50% of their income on tax returns. However, each is required to report 100% of their income on tax returns when it comes to separate property.
- While community property is subject to an equitable division during a legal separation such as a divorce or an annulment, separate property is safe from the trials and tribulations of splitting and remains its own.
- In the event of a spouse's demise, each asset needs to be determined in its status. In simple terms, the assets are required to be clearly distinguished as community property or the separate property of one of the spouses. It's quite crucial for tax purposes as the separate property of the deceased and one-half of the couple's community property are subject to federal estate tax. In such circumstances, the surviving spouse’s separate property and the remaining one-half of the community property remain unaffected. However, the question of who receives the deceased spouse’s separate and community property is usually easy if the partners have simple wills that states that they leave their entire acquisitions to each other, or if they both pass away, it goes to their children.
No matter the situation, one must always look out for themselves and plan a few steps for the future. As they say, "Better have it and not need it than need it and not have it". Life is unpredictable, and no matter how beautiful a marriage is, one must always have a backup plan, which, in this context, is to classify your assets carefully. We hope you can now discern what distinguishes separate property from community property and plan your assets accordingly.