When a couple gets married, their separate assets become “joint assets.” Most couples share property, which can become confusing for tax purposes. The Internal Revenue Service cites community property as something classified under common law for most states, which means the person’s name on the deed is the owner of the property. States where there is a community property law may find it to be a little confusing. The property is shared between the couple regardless of whose name is found on the deed. Understanding how the community property law works is important if a couple is planning to divorce or just trying to figure out how to properly file taxes.
Community Property States
The community property law is starting to fall away in many states. Only Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are currently honoring the law. This is due to some of the things that a spouse can be liable for if the couple gets divorced or if a spouse passes away. With this law, half of each spouse’s income is technically owned by the other spouse during the marriage and all debts are now considered debts of the couple.
According to the community property law, you could be liable for all student loan debt that your spouse accrued. The separation of the two will come with a spouse that has been given a gift, separate property acquisition, and inheritances. For example, if a spouse inherits a car from a deceased loved one, or if one is gifted the car, the car is considered separate property because it was inherited. But if one spouse purchases a car, it is considered community property because the couple purchased it while they were married. Where the law starts to get complex is when you combine assets like a checking account. Say you were given a nice inheritance 10 years ago and you opened a checking account with it. Once you got married, you chose to share your checking account with your spouse. Your inheritance is now considered community property since the funds have now mixed with the funds of your spouse.
Prenuptial Agreements
If you live in a state where things are deemed community property, it is a good idea to speak to your lawyer about a prenuptial agreement. This document can assist in protecting property, money, and other assets that should not be taken from you in the event of a divorce. For the most part, marital property is anything that a couple gains when they are together. However, the tricky part is when you have separate property. If you accumulate assets while married, but bought property in only your name while you were married, it can easily become part of the divorce proceedings if your spouse tries to take it from you. The common law states have an easier time distinguishing which spouse owns what because they go by the name of the deed and other documents. The reason a prenuptial agreement is a smart idea is it protects both parties. Let’s say you are the only spouse who works; in the event of a divorce, all of the money that you have accumulated can be taken by your spouse. The same goes for all the debts that you accumulate together during the marriage. A prenuptial agreement will state what both spouses feel is fair at the time they are married. This means you are able to keep the money you made, or you are liable for a percentage of the debts instead of all the debts.
Byline
Max Sheffield is a former family law lawyer who lives in San Francisco, CA. He actively blogs on family law, property law, real estate and other similar matters.
Image credit goes to JohnRadin.