Common law property vs. community property: What to know if you move

There are many things to think about when considering a move to a new state with your spouse: searching for a new home, packing, maybe scheduling movers. One aspect of the move that might not be top of mind? State by state differences in property ownership rights for married couples.

Community property and common law property are two legal terms that designate who owns what when it comes to a married couple’s assets.

In a community property state, usually any income or property acquired by either spouse during the marriage belongs to both partners equally, regardless of who earns the income or purchases the asset. Currently, there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

In a common law property state, the property that each spouse acquires during the marriage may belong solely to that spouse with certain exceptions. Common law property is, well, more common; it’s the approach in 41 states.

Why does this matter? The laws impact how assets may be divided if a couple is divorcing or one partner has died. Because the laws vary from state to state, a move can lead to unintended consequences.

Examples of the common law property and community property systems

Trisha Baggs, lead wealth planning strategist at Wells Fargo Wealth & Investment Management, explains how common law provisions might work. “Let’s say one spouse doesn’t have a lot of individual property, and the other spouse has generated individual wealth during the marriage by working,” Baggs says. “If the spouse with more property dies and wrote a will that leaves all assets to charity or another family member, laws in common law jurisdictions may allow the surviving spouse to elect against the estate, so he or she can take a share even though the assets were titled in the deceased spouse’s name.”

In a community property state, however, Baggs explains, the scenario above would play out differently. Here, it’s assumed each spouse has a 50% interest in the assets, and that any income or property acquired by either spouse during the marriage belongs to both partners equally, regardless of who earns the income or purchases the asset.

That may not sound like a problem, but if a couple moves into a common law state from a community property state, they should have an estate planning attorney review their current plan to ensure their assets will pass as they intend.

What assets are covered by these laws

Community property and common law provisions apply to tangible assets — like cars, real estate, and fine art — and intangible assets, including cash, investments, patents, and interests in a business. They can even apply to debt accrued during the marriage.

In both systems, typically assets acquired by one spouse before the marriage, inheritances, and gifts are considered separate property — unless the couple does something like adding one spouse to the deed for real estate the other owned before marriage or “commingling” an individual asset with shared assets, such as by putting inherited money into a joint account.

When you move from state to state, some assets can’t be packed in the moving van. But, they may still be impacted by your location, not the asset’s. Baggs offers this example: “Let’s say you live in Arizona, a community property jurisdiction, and you buy a piece of property in Maine, a common law jurisdiction. If you use community funds to purchase that property, it will typically be considered community property.”

For the reverse, if you’re buying property in a community property state but live in a common law state, remember that common law states may not apply community property law to that purchase. Consulting a lawyer in these instances is recommended.

The importance of planning — and who can help

Understanding your state of residency’s position on common law versus community property can be an important part of your overall estate and wealth plan. It can help you to determine if you need a prenuptial or postnuptial agreement (which could be structured to preserve certain assets). And it’s an even more important planning consideration when you move to a different state, when you purchase assets outside your state, or when you engage in estate planning.

A trusted lawyer and your financial team can help you and your spouse determine the approach that works for you in your new state of residence. Baggs suggests some questions to consider with those experts: “Do both spouses need to consent to gifts? How much can each spouse transfer without incurring transfer tax consequences?”

In fact, Baggs says that one of the best ways to make your move as smooth as possible is to connect your team in your current state with your team in your new state. “That’s the lawyer, that’s the CPA, that’s the financial team, whether it’s a financial advisor or wealth advisor — whoever is advising about the assets and the plan. They can coordinate what’s been done in the existing jurisdiction and what needs to be done in the new jurisdiction. Are changes necessary or is everything good the way it is?”