Characterization of Property
Once married, a couple's property is either characterized as marital, separate, or community property. Marital property is the property and debt that a husband and wife acquire during marriage for the benefit of the marriage. Everything a married couple acquires during the marriage is owned by the two of them, regardless of in whose name the acquisition was made or whose money was used to purchase it. As a general rule, property and debt acquired after the date of separation is not marital, unless a marital resource was used to acquire it.
Property that is not marital is called non-marital or separate property. This property belongs to only one of the individuals in the marriage, not to both. The property that each spouse brings into the marriage is considered to be separate or non-marital property. In addition, inheritances, including bequests and devises, and gifts from third parties, are the separate property of the acquiring spouse, even if they are acquired during marriage. In order for the property to remain separate, the spouse must keep it entirely in her own name. Once the separate property has been commingled (mixed) with marital or community property, it becomes part of the marital property.
In addition to marital property and separate property, there are 9 community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In addition, Puerto Rico is a community property jurisdiction.
In these states, the income earned and the property acquired during a marriage is shared equally by the spouses. This is true even if one spouse earns all the money used to acquire the property. While there are differences in each state, all states have special laws that operate on the theory that both spouses contribute equally to the marriage. Therefore, all property acquired during the marriage is the result of the combined efforts of both spouses.
By virtue of community ownership, each spouse has an equal right of management and control of the community property; however, the property cannot be bought, sold or mortgaged without the other spouse's consent.
EXAMPLE: If John buys a vehicle with his earnings, Mary owns it as well, even though her name is not on the title. John cannot secretly buy property during the marriage with his earnings and claim that it is separate – the property belongs to Mary, too.
As stated, in community property states, income earned by one spouse is treated as if the other spouse had earned half of it. This treatment has important tax consequences. For example, spouses filing separate returns must report half of the income the other spouse earned.
TIP: More information on tax liability in community property states can be found in IRS Publication 555, or online at www.irs.ustreas.gov/pub/irs-pdf/p555.pdf.
Not only are assets community property, one spouse's debts also belong to the other spouse. For example, a wife is liable on her husband's credit card debt. However, community property cannot be used to satisfy a separate debt of either spouse. For instance, if a couple pays off the wife's student loan during their marriage, the husband is entitled to a reimbursement should the marriage end.
Marriage in community property states does not completely obliterate all separate property. The property and assets a spouse brings to the marriage remain her separate property as long as they are not commingled with community assets. Inheritances and gifts are also the separate property of the spouse who received them. Additionally, spouses can make written agreements dividing, or partitioning, the property acquired during marriage.
I have $10,000 in a bank account. Will the cash belong to my husband as well if I continue to keep the money separate from our joint accounts?
No. The $10,000 remains your separate property as long as you keep it separate. The money must remain in an account that marital earnings (such as your and your husband's income) are not deposited into.
I have an IRA that I plan to continue to contribute to after I get married. Will it still be my separate property?
No. If you add money to the IRA with your earnings after you marry, the IRA will become marital property. Your earnings are marital property and by using those earnings to increase the IRA, you have commingled separate and marital property.
SIDEBAR: Once separate property assets are commingled with marital property, the assets become marital property. In some cases, the separate property can be traced or followed, but typically monetary assets become so commingled they are characterized as marital property.
My husband had a lot of money in our bank account when we got married. Now that we are divorcing, he wants to be reimbursed. Does he get back the original amount he had in the account at the time of our marriage?
No. Since the bank account became both of your account, the money has been commingled and all the cash in the account is now marital property.
My parents are giving me $5,000. Is this my separate property?
Yes. Gifts given to one spouse are that spouse's separate property. However, if you deposit the money in your joint account, it will become commingled with martial property.
I have inherited an office building from my grandparents. Does it belong to my husband as well?
No. Your inheritance remains your separate property. If you sell the building, that amount remains your separate property as well if you are careful not to commingle it.
TIP: Rental payments from leasing the building are income and count as marital property.
I receive gas royalty payments every month on some mineral interests I owned before marriage. Are the payments community property?
Yes. Royalty payments earned during marriage are characterized as income. Income in a community property state belongs to both spouses. However, the mineral interests themselves (which produce the gas for which you are being paid) are not community property since you owned them before you were married.
I live in a community property state. My husband took out an equity loan on our house and can't make the payments. Do I have to make them?
Yes. The bank that made the loan can sue you, as well as your husband, to recover the money. Because you live in a community property state, even though you did not sign off on the documents you are liable for all of your husband's debts (and vice versa).
We are moving from a community property state to a non-community property state. Will our assets become separate property when we move?
No. The assets you and your spouse acquired remain community property. For instance, the money you receive from selling your house in Texas (a community property state) is community property. When you use the money to buy a new home in Oklahoma (a non-community property state), that house is community property.
My wife and I are divorcing. Can she sell the jewelry she acquired with our money while were married and keep the money?
No. Unless you agreed otherwise, the jewelry belongs to both of you and you are entitled to split the proceeds.
Converting marital property to separate property
Marital property can only be converted to separate property by a written agreement, such as a postnuptial or partition agreement (see below). Oral agreements to convert marital property into separate property are not valid and will not be enforced by the courts. For example, a verbal agreement that each spouse's income belongs to the earning spouse is not enforceable.
Marital property that can be converted includes income from separate property that is typically owned both spouses. For instance, in a community property state, rent a wife receives on a duplex she owns separately is characterized as community property under the law. However, the spouses can agree in writing that those rental payments will remain her separate property.
Converting separate property to marital property
At any time during marriage, spouses can agree that all or part of their separate property is converted to community property. However, the agreement must:
- be in writing;
- be signed by both spouses;
- identify the property being converted; and
- specify that the property is now community property.
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