Understanding Martial (community) vs. Separate Property

If you are married or are getting married, then you may want to consider how marriage affects your assets. When it comes to the division of assets during a divorce, the U.S. states have two primary systems: (1) community property and (2) equitable distribution. These systems dictate how marital assets and debts are divided upon divorce. Here's an explanation of each system:

Community Property State:

1. Definition: In community property states, all assets (and debts) acquired during the marriage are considered "community property," meaning they are jointly owned by both spouses, regardless of which spouse earned or acquired them.

2. Division: Upon divorce, community property is generally divided equally between the spouses, with each spouse getting 50% of the total. This does not necessarily mean every asset is split down the middle, but the total value of the assets should be roughly equal for each party.

3. Separate Property: Not everything is necessarily considered community property. Assets and debts a spouse had before marriage or acquired as a gift or inheritance during the marriage are typically considered "separate property" and are not subject to division upon divorce.

4. States: The community property system is adopted by a minority of states. They include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Some states might have variations on the community property system. Alaska is unique in that it allows couples to opt into a community property system through a written agreement. However, this is like being updated with times, so it is important to double check the current statutes and laws in your state.

Equitable Distribution State (or Equitable Division State):

1. Definition: In equitable distribution states, marital assets and debts are divided in a manner deemed "fair" or "equitable" by the court. Importantly, "equitable" does not necessarily mean "equal."

2. Factors Considered: The courts in these states will look at a variety of factors to decide the fairest division. These can include the length of the marriage, each spouse's financial and non-financial contributions to the marriage, each spouse's financial and future needs, the age and health of each spouse, the source of the assets, and more.

3. Separate vs. Marital Property: Equitable distribution states also distinguish between separate and marital property, similar to community property states. However, the exact definitions and the treatment of mixed assets (e.g., if one party had an asset before marriage but both contributed to it during the marriage) can vary significantly from one state to another.

4. States: The majority of U.S. states use the equitable distribution system.

In practice, we have seen that both types of systems end up looking very similar. Unless the factors in an Equitable Distribution State weigh heavily in your favor, a judge will likely distribute the assets in the way a judge would in a Community Property State. 

When it comes to marriage, state laws distinguish between two types of property: (1) Separate Property, and (2) Marital Property. 

So what is considered Marital Property?

In simplest terms, martial (also know as community) property is a legal framework for property ownership and division that is primarily applied in several U.S. states. The core principle of marital property is that most assets and debts obtained during the course of a marriage are considered jointly owned by both spouses, with each spouse typically having an equal interest in these assets and an equal responsibility for these debts. However, an asset, business, or debt that was once considered separate property can easily become community property, if during the marriage, you contributed to the property or commingled the property using marital assets. In fact, even your effort to grow an asset can make the property martial property. The division of marital assets can become particularly complex when it involves businesses, retirement accounts, and real estate. In such cases, a fair market valuation is often necessary to determine how assets should be distributed. Additionally, community property states may have exceptions for certain assets, such as gifts or inheritances to one spouse, which may remain separate property.

What is considered personal property?

It is important to distinguish what the state will consider a separate property versus marital property. Generally, separate property consists of assets and debts which typically include the following:

• Property owned by a spouse before the marriage
• Assets acquired by gift or inheritance during marriage, intended solely for one spouse
• Income generated from separate property (such as rent from a premartial house)(conditions apply)
• Property or assets that both spouses explicitly agree to classify as separate property through a written agreement or contract. 
• personal assets are those owned by an individual before marriage or received by gift or inheritance during the marriage. These assets are generally considered separate property and are not automatically subject to division upon divorce. However, it is essential to maintain the separate nature of these assets. Commingling separate assets with community property can blur the distinction and make them vulnerable to division.

So how can I protect my personal assets from turning into marital property?

If you are looking to protect your assets from your soon to be spouse, doing so requires careful planning and a thorough understanding of the legal system. And even then, your efforts will not be bullet proof. While community property laws generally dictate that most assets acquired during a marriage are considered jointly owned, there are strategies you can employ to safeguard your personal assets or modify the default rules.

1. Prenuptial & Postnuptial Agreements: One of the most effective ways to protect your assets in a community property state is by entering into a prenuptial agreement (before marriage) or a postnuptial agreement (after marriage). These legally binding contracts allow you and your spouse to define how you want to handle property division, spousal support, and other financial matters in case of divorce. These agreements can help you maintain the separate character of specific assets or income. 

2. Maintain Separate Bank Accounts & Records: Keep separate bank accounts and financial records for your assets that you want to remain separate property. You absolutely want to avoid commingling funds with your spouse in these accounts, as doing so could very easily blur the line between separate and marital property.
3. Gift & Inheritance Management: Assets received as gifts or through inheritance, that are solely intended for you, are generally considered separate property. To maintain this separation, you should ensure that these assets are kept in your name alone and not shared with your spouse. 
4. Record Keeping: Keep thorough records of financial transactions and asset acquisitions. This documentation can help prove the separate nature of certain assets or income in case of a dispute. 

Ultimately, assets can easily become marital property. While martial property laws can simplify the process by presuming an equal distribution of marital assets, they also require careful consideration and planning, especially for individuals who want to protect their personal assets. Understanding the nuances of marital property laws and consulting with legal professionals are key steps in managing personal and marital assets effectively.

If you have any questions about your specific situation or how to further protect your personal assets, we invite you to contact us at 602-230-2014 or [e-mail].