Community Property vs. Separate Property: How Each Affects Your Estate Plan
If you are legally married, it’s important to know how your marital status will affect the distribution of your estate. For instance, whether or not your spouse inherits your property depends on which state you live in. Some states consider certain assets to be community property, while in others they are considered separate property.
Arizona is a community property state, but some of the rules of separate property still apply when it comes time to settle your estate. Let’s compare the differences between community vs. separate property, so you can get a better understanding of what will happen to your assets after you’re gone.
Community Property vs. Separate Property
What Is the Definition of Community Property?
The term “community property” applies to any property that both you and your spouse own jointly. It can include things like your income, vehicles, real estate, pensions, and retirement accounts.
If you live in a community property state like Arizona, the law dictates that property acquired by either spouse during the marriage legally belongs to both of you, no matter whose name is on the account, title, or deed.
However, any property that you acquired before your marriage, as well as any inheritances or gifts you receive are considered separate property, and your spouse is not entitled to them. So if you and your spouse purchased a home before you got married, but only one name is on the deed, then only that person owns the property.
What Happens to Community Property When One Spouse Dies?
Unless their will says otherwise, when one spouse dies half of their community property automatically goes to the surviving spouse. The other half goes to their surviving heirs, according to the wishes laid out in their will. If they did not have a will, then the other half of their assets will be distributed to their next of kin according to the laws of intestate succession.
Because of the way community property is divided, you cannot leave the entirety of a marital asset to anyone besides your spouse. For example, if you and your spouse purchase a vacation home during your marriage, you can’t leave it entirely to one of your children—you can only transfer your half of the ownership.
If you don’t want your half of shared property to go to anyone other than your spouse, then you can re-title them as tenancy by the entirety. This form of ownership gives your shared property the right of survivorship, which means that the surviving spouse will own it entirely. This option is only valid in Arizona, California, Nevada, Texas, and Wisconsin.
Including Community Property in Your Estate Plan
Even in a community property state, you still have some control over who will receive your portion of the shared assets. You can give your half of the community property to specific beneficiaries by leaving instructions in your will or in a trust. If you plan to leave your shared assets to the same beneficiaries as your spouse, you can also create a joint will or joint trust.
Both spouses sign a joint will, and either of them can make changes as long as they are both alive. If one spouse passes away, the will is then “set in stone,” and the assets pass to the surviving spouse. After the death of the remaining spouse, the assets will be distributed according to the instructions in the joint will.
When you create a joint trust with your spouse, the community property assets you place in it will avoid probate. A joint trust also gives you the option for each spouse to name separate beneficiaries. You can decide to let the trust stay the same after the death of one spouse, or you can decide to split it into two separate trusts if one spouse dies.
In the case of a split trust, each trust will hold one spouse’s separate property and their half of the community property. The surviving spouse will not be able to make changes to the deceased spouse’s trust. But, if the joint trust does not split, then the surviving spouse can still amend it as necessary.
After both spouses pass away, no one will be able to modify the joint trust or separate trusts in any way. The successor trustee will distribute the assets according to the deceased couple’s instructions.
What Qualifies As Separate Property?
In separate property states, property that one spouse acquires during the marriage belongs to only that spouse. In order to be considered separate, the property cannot be used by the other spouse.
As we discussed above, you can still own separate property in community property states as long as it was acquired before the marriage, or received as a gift or an inheritance. But if you want your separate property to go to your spouse, you will need to name them as the beneficiary of that asset, or retitle your separate property as shared property.
If you die without a will, all of your assets will transfer to your spouse after the long and expensive process of probate is complete. So, if you want to divide your separate property among different beneficiaries, it’s essential that you list them in your will or create a trust.
How Does Separate Property Become Marital Property?
There are a couple of ways that separate property can legally become community property. Oftentimes, separate property can become so intertwined with community property that it becomes difficult to tell which is which. For example, if the funds from one spouse’s inheritance are placed in a joint bank account, it’s harder to distinguish them as separate property. This is legally referred to as “commingling.”
You can avoid commingling assets by keeping them in separate, personal bank accounts. Do not put your spouse’s name on the asset or the account, and avoid using the funds from a separate asset on joint purchases or investments. If you do want your spouse to have access to a separate asset, you can let it commingle or leave it to them in your will or trust.
Another way to turn separate property into community property is through transmutation. This legal agreement allows you to change the classification of an asset from separate property to community property, or vice versa. You and your spouse must both agree to the change, and you must retitle the asset in both of your names if you want it to become community property.
Arizona Estate Planning Attorneys
Figuring out whether an asset is community vs. separate property can be very confusing, and might make the process of setting your affairs in order seem overwhelming. Luckily, the experienced attorneys at Phelps LaClair are here to help you navigate state laws and create an estate plan that successfully fulfills your wishes. If you need estate planning assistance, call us at 480-892-2488 today to schedule a consultation.