COMMUNITY PROPERTY LAWS The Good, the Bad, and the Ugly

The Good, the Bad, and the Ugly

By Shawn O'Connor

    Community property agreements are designed to alter or amend the effects that the community property laws of your state may have on your marriage. The community property estate which belongs to a married couple generally begins at the time of the marriage, or thereafter, depending upon the state you are married in, or in which you are living. The community property laws were designed primarily to equalize the rights of the husband and wife as far as the ownership of marital property was concerned.
    Prior to community property laws the wife was usually at a disadvantage when it came to acquiring or having legal ownership in property during a marriage. It was especially disadvantageous to a married woman in the event of a divorce when the husband was primarily responsible for providing the income, his earnings, to obtain property. Upon a separation or divorce the wife generally received little if any of the property acquired during the marriage. At one time in our history women were prohibited by law from owning real property, which became especially troublesome for the women when property was acquired during the marriage, regardless of her contribution towards that property.
    The history of marital property law shows a gradual spread of the community-property system. In ancient Rome—except for one period—wives had few property rights; whatever was theirs became their husbands’ upon marriage. Community property is a marital property regime that originated in civil law jurisdictions and is now also found in some common law jurisdictions.  The states of the United States that recognize community property are primarily in the West; it was inherited from Mexico's ganancial community system, which itself was inherited from Spanish law (a Roman-derived civil law system) and ultimately from the Visigoths. Even Louisiana, in a rare departure from the Napoleonic Code, was forced to adopt the community system while under Mexican rule, thus ousting the traditional French community of movables and acquests.
    In a community property jurisdiction, most property acquired during the marriage (except for gifts or inheritances, and there are even exceptions here) 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. This theory is in effect whether both spouses work outside the home or household, or not.
    In the United States there are ten community property states.  The community property system, which is derived from Spanish law, is found predominantly in western states: Arizona, California, New Mexico, Nevada, Idaho and Washington, as well as Texas, Wisconsin and Louisiana. In Alaska, couples can opt in for community property. Common law, which is derived from English law, governs the rest of the states and the District of Columbia.
    Henry Fonda and Lucille Ball brought the concept of community property to the viewers in the movie Yours, Mine and Ours which humorously depicts community property responsibilities, advantages, and disadvantages. Most couples, whether married, cohabitants or in same-sex unions, never give a thought to who owns what until a significant legal issue raises the question. That's often when a lawyer will introduce the term "community property," a friendly sounding phrase that can have some unexpected and unintended consequences.
    The right of a creditor to reach community property in satisfaction of a debt or other obligation incurred by one or both of the spouses also varies from state to state. It is extremely important to bear in mind that there are no two community property states with exactly the same laws on the subject. The statutes or judicial decisions in one state may be completely opposite to those of another state on a particular legal issue. For example, in some community property states (so-called "American Rule" states), income from separate property is also separate. In others (so-called "Civil Law" states), the income from separate property is community property. The right of a creditor to reach community property in satisfaction of a debt or other obligation incurred by one or both of the spouses also varies from state to state.
    Community property laws have certain federal tax implications, which the Internal Revenue Service discusses in its Publication 555. There are also important considerations you must take into account for states which have an income tax return filing requirement when filing your tax returns, and sometimes more importantly, if you do not file tax returns.
    Community property agreements can be limited to just a few items of property, or the agreements may involve all of the property owned by each spouse, whether considered separate property or community property by state law. For example, under certain circumstances it may be to your advantage to ensure that the earnings of each individual spouse is treated as the separate property of each, while holding real estate as community property is better suited for your particular circumstances; or vice versa. Or, you may wish to hold various pieces real estate as separate or community property. Vehicles, stocks, savings accounts, checking accounts, virtually any property, or rights to property, acquired during marriage can be transmuted to either separate or community property.
    Community property agreements must be reduced in writing to be effective. While there may still be some states that do not require the agreement to be reduced to writing, it is anticipated as of the writing of this article that eventually all jurisdictions will require a community property agreement to be reduced to writing.
    It is vital to understand that not only is the agreement important, but how you actually treat your property will be recognized as the most controlling factor of the intent of the parties. In short, if you’re agreement provides that certain items of property are to be considered separate property, but you actually treat that property as community property in your daily affairs, it is very likely that your actions, and not the agreement will dictate the status of the property.
    Many people do not recognize the “gorilla” sitting in the room with them until the consequences of community property laws come into play. For example, it may not occur to the wife that not only does she have fifty per cent interest in all of the assets and property acquired during the marriage, but conversely she has a fifty per cent interest in all of the liabilities acquired during the marriage, unless specifically otherwise provided. I mention only the wife because in the beginning, the idea of community property laws was to bring the wife’s station in the marriage on par with the husband’s rights regarding property ownership. So, husbands be advised that you too can be held liable for halve of your spouse’s liabilities.
Whatever your reasons or needs may be, if you are affected, or could be potentially affected by community property laws you may wish to educate yourself in this area.

    If you would like a perspective of how Community Property Laws, or Marital Property Law may interface with Federal Income Taxation you may wish to check out the Internal Revenue Service’s viewpoint.  Simply enter the following search phrase –  25.18.1 Basic Principles of Community Property Law  – into your browser’s search engine.  Be forewarned, however, that these laws are complicated and the IRS’ opinion is just that, an opinion.  In short, they could be correct, or not.  In either event, the information the site has to offer is worth the read, if you are so inclined in the art of legalese.   [12-12-15]

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News Flash

Uncertainties of the Income Tax
(Courts At War with Themselves)

by Larry Becraft, Attorney

For several years now, a variety of high public officials have openly declared that the federal income tax laws are incredibly complex and need to be either substantially revised or scrapped.   But after making such statements, these officials invariably fail to identify what  specific parts of  the tax laws suffer from this condition, choosing instead to conceal them. Are the objectionable parts of the federal tax code secretly and quietly discussed behind closed Congressional committee doors? If they are, why doesn't someone inform the American public of these deficiencies so that they may likewise participate in this debate? Is it possible that it is the major and not various minor features of the tax laws which are complex, even uncertain? Is it possible that these major features are so fundamentally flawed that they simply cannot be repaired? If so, what is the legal consequence of this complexity?

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