For community-property rules to apply, there must be two things in play: a valid marriage and a residence in a community-property state.
In the U.S., most states use the common-law system; the other states use community-property. There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Living in one of these states can have an effect on a couple’s finances. However, keep in mind that while these states share some common features and definitions, there is no one uniform community-property system.
Essentially, any assets that are accumulated during marriage in a community-property state are owned jointly and if there is an annulment or divorce then assets are split equally no matter who earned them. If a couple amicably splits, community-property laws may not even come into play if the individuals can agree on who gets what. A pre-nuptial agreement also tends to trump community-property laws.
It’s important to note that this article is not intended to be legal advice; it’s simply an educational overview of community-property. Talk with a lawyer for specifics on community-property state laws and how they can affect your specific situation.
History of the Community-Property System
Brought to America by Spanish and French colonists, this concept was intended to encourage equality. Because a marriage is a community consisting of two marital partners who, through their joint labors and efforts, contribute to the prosperity of the marriage, both spouses possess an equal right to the property and its benefits.
Community-Property States: Assets Owned Prior to Marriage
Any assets a person owned before joining in matrimony are typically still considered separately owned. For example, if Jane Doe owned a home before she married John, the home doesn’t automatically become John’s property after marriage, even if living in a community-property state. Things can get tricky though if you get divorced and did not take inventory of what you owned prior to marriage.
Other than assets owned prior to marriage, other property that is considered separate in a community-property state may include:
- Property acquired by gift
- Property acquired by inheritance or bequest from a will
- Property acquired in a court award
Changing Status of Property in a Community-Property State
Most community-property states allow spouses to determine or change the character of their property as community or separate. The legal term for this action is transmutation. There are two important transmutation restrictions:
- Federal law obligations cannot be avoided by transmuting property;
- A transmutation that is effective between spouses may not be effective against third parties like creditors.
If married couples move from a community-property state to a common-law state, this does not change the character of the marital property acquired in the community-property state unless the couple takes steps to change the status.
Overall, if you live in a community-property state, it’s not a bad idea for spouses to keep organized records of their personal financial matters.
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Life Insurance and Community-Property
So, how do community-property laws affect life insurance policies?
Generally, policyowners have a lot of flexibility on who they want to name as a beneficiary of their policy. Many times a policyowner will name a spouse as a beneficiary, but sometimes not. They can name an adult child, parent, or even a close friend; however, if they live in a community-property state and income earned during the marriage is used to pay the premiums then typically the spouse legally has rights to 50% of the death benefit.
Example: John Doe lives in California and has a term life insurance policy in which he designates his mother and father as the beneficiaries. He then marries Jane Doe, but forgets to update the policy. He unexpectedly dies but because they live in a community-property state and John paid premiums with “jointly owned” income, Jane automatically receives half of the death benefit, with the remaining half going to John’s parents, even though she wasn’t listed on the policy.
When alive, if John wanted to name his parents sole beneficiaries and not have Jane be a beneficiary, Jane would have had to sign a consent form waiving her rights to the death benefit.
This example is not always 100% the case, and permanent life insurance policies can be more complex than term, so it’s important to work with a professional who is knowledgeable about community-property laws. Start planning now by getting an instant and anonymous term life insurance quote. It takes just 30 seconds, plus Quotacy does not require any contact information until you are ready to apply.
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About the writer
Natasha Cornelius, CLU
Senior Editor and Licensed Life Insurance Expert
Natasha Cornelius, CLU, is a writer, editor, and life insurance researcher for Quotacy.com where her goal is to make life insurance more transparent and easier to understand. She has been in the life insurance industry since 2010 and has been writing about life insurance since 2014. Natasha earned her Chartered Life Underwriter designation in 2022. She is also co-host of Quotacy’s YouTube series. Connect with her on LinkedIn.