What is the difference between community property and separate property?Community property rules differ from state to state. The following discussion applies to residents of Texas.
Community property is distributed differently than separate property if you die without a will. To learn how, see my FAQ entitled "Who will get my property if I die without a will?"
All property (including cash) is classified as community or separate based on when and how it was acquired. Converting assets into cash and back again does not affect the classification. For example, if a separate property asset is sold during the marriage, the proceeds of that sale and anything purchased with them will remain separate property. However, you must be able to "trace" the proceeds from each sale to each purchase to prove that the property is separate property. Unless you keep excellent records, this can be difficult.
Community property consists of the following:1. Earned income from the work of either spouse during the marriage.
2. Dividends, interest, and capital gain earned on community property.
3. Dividends and interest earned on either spouse's
separate property during the marriage.
Separate property consists of the following:1. Earned income from the work of either spouse before the marriage.
2. Capital gain on separate property.
3. Gifts and inheritances received by either spouse before the marriage.
4 Gifts and inheritances received by either spouse
during the marriage, including joint gifts.
A particular asset can be a mixture of community property and separate property. For example, suppose you and your spouse purchase a house using a cash gift from your parents as a 20% down payment. You obtain a mortgage to purchase the rest. The house is 80% community property because you used community credit to cover 80% of the purchase price. Ten percent of the house is your separate property, and ten percent is your spouse's separate property, because gifts are always separate property. If you die without a will, your minor children will inherit most of your 10% separate property portion, which will create extra expense and hassle for your spouse.
A few points to remember about community property:Don't confuse community property with jointly-owned separate property. Anyone can jointly own property, whether married or not. But only spouses can own property as community property. Before they can partition the property, they must convert it into separate property.
If you mix community property with separate property, such as by depositing both in the same bank account, the entire amount will be presumed to be community property, until and unless you can prove otherwise. The best way to protect your separate property is to keep it separate!
Other laws can sometimes trump community property laws. If a husband uses community property to purchase a life insurance policy and then names his mother as the beneficiary, his wife generally will not be entitled to any of the proceeds upon his death, because insurance law takes precedence in this situation. Similarly, if a wife contributes community property to an IRA and names her children as the beneficiaries, her husband generally will not be entitled to any of the IRA funds upon her death. To fully determine your rights in your community property, you should consult an attorney who can take your particular facts into account.