Marital property laws shape what happens to property in the context of a divorce or upon death of a married individual. These laws differ by state, and they have important inheritance and tax considerations.
Nine states operate under a community property system, which typically regards income earned and assets acquired during marriage to be property of the ‘community’ that is the married couple. With certain exceptions, each spouse owns a 50-50 share in the community property.
These so-called community property states are as follows:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
Holding property as community property can deliver substantial tax savings. Upon the death of one spouse, the entire community property is revalued based on the current market. For an asset that has gained in value since it was acquired, taxes that would otherwise be owed on that gain from acquisition through death of the first spouse are eliminated.
As a result of this potential tax benefit and other considerations, some states that are otherwise operate based on a common law system nonetheless allow their residents to make community property elections in certain instances.
- In Alaska, spouses may optionally opt into classifying their property as community property
- In Florida, following the enactment of the Community Property Trust Act effective July 1, 2021, Florida couples can use joint trusts to classify property that may not otherwise be community property as community property
While advantageous for many, the potential tax benefits of community property are not the only consideration married couples should make when deciding to hold property as separate or community property. Separate property typically confers greater asset protection than community property, and individuals who enter into marriage with vastly different net worth may wish to keep their property separate in the event of divorce or to accommodate different gifting goals upon death. Married couples should evaluate which property structure is best for them based a comprehensive outlook on their goals and needs.
