Advisors: Do You Know Which U.S. States are ‘Community Property’ States? Your Clients Certainly Need to Know

For those financial advisors serving married couples, it is important that you know how marital assets could be divvied up in the event the spouses become divorced.

Most states in America are governed by what is known as ‘equitable distribution’ rules, which essentially state that any property, income or debt acquired by one spouse during the course of the marriage belongs to that spouse individually.

Property could include homes, vehicles and even bank accounts. If a couple in an equitable distribution state decides to part ways, each individual spouse, theoretically, retain that property that was theirs to begin with.

During the divorce, the assets are divided up in a “fair and equitable” way, hence the name.  

A small handful of states, however, are governed not by equitable distribution rules but rather ‘community property’ rules, which essentially state that any property acquired by one spouse during the course of a marriage belongs to both spouses equally.

This means that during divorce proceedings, one spouse can make a claim to half of the other spouse’s property.

There are currently nine community property states in the U.S. They are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Three additional states, Alaska, South Dakota and Tennessee, are governed by equitable distribution rules, however, they give married couples the option to opt in to community property rules.

In those states, spouses have to craft a community property agreement that spells out what property is to be considered joint property equally belonging to both individuals.

It is important for financial advisors serving married couples to understand the difference between community property states and those governed by equitable distribution since getting an overall picture of a couple’s finances is part of the job of being a financial services professional.

It should be noted, however, that even in community property states, there are some exceptions that allow certain property to remain under sole ownership of the individual who acquired it.

Examples of things that are kept separate include any student debt that was incurred only by one spouse, proceeds from a personal injury settlement, or any tort liability incurred by one spouse that arose from an incident involving only that individual spouse.

Furthermore, keep in mind that community property is only that property that was acquired after the couple entered into the marital union and not before.

An exception would be something like a bank account. If the account belonged to one spouse, but the other spouse ended up becoming a joint owner of the account after marriage, the account would now be considered joint property.

As for workplace retirement accounts, such as a 401(k), any contributions made during the course of the marriage would also, technically, be jointly owned by both spouses.

Social Security is slightly different in that you had to have been married for at least a full decade in order to be able to receive a portion of your spouse’s benefits.

If you plan to reside in a community property state, or if you already live in one, you may want to consult a qualified financial professional either before getting married, or right after doing so, to ensure that you are protecting yourself and your assets in an appropriate manner.    

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