Key Takeaways
- Common law property is a legal system determining ownership of property acquired during marriage, usually favoring the individual who acquired it.
- In common law states, property acquired by one spouse is considered solely theirs unless both names are on the title.
- Unlike community property, common law property does not automatically grant ownership to both spouses.
- Understanding common law property is crucial for estate management in cases of divorce or the death of a spouse.
- The common law property system impacts how assets are divided, affecting financial decisions and plans.
Defining Common Law Property
Common law property is a legal system used by most states to determine individual ownership of property acquired during marriage. Property usually belongs to the spouse who earned it or whose name is on the title under this system, unless both spouses are listed as owners. This is different from community property states, where most assets acquired during marriage are owned equally by both. Understanding common law property can help in estate planning and managing assets after a divorce or death, as ownership rules can affect the treatment of property.
Comprehensive Guide to Common Law Property
As an example of how a common law property system works, if one partner purchases a boat, car, or other vehicle and puts only their name on the title, then that vehicle belongs exclusively to that person. If this partner lived in a state that recognized community property, however, then the vehicle would automatically become the property of both partners in the marriage.
Only nine states recognize community property. They are:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
Three other states—Alaska, South Dakota and Tennessee—are “opt in” states for community property. Whether a state has a common law or community property system, the division of assets in a divorce also may be determined by a prenuptial agreement or a postnuptial agreement if the divorcing couple has one.
The distinction between common law and community property law is important not only in cases of divorce but also in ongoing wealth management. For high-net-worth individuals in particular, a wealth manager might go to great lengths to determine the rightful ownership of certain assets, in either common or community property situations. Wealth managers also may be involved in the creation of wills and trusts and overseeing the passing of wealth from one generation to the next, all of which may be affected by whether the assets in question are governed by common or community property law.
Important
Common law property rules can apply not only to tangible assets, such as cars, real estate, and fine art, but also to intangible assets, such as patents and trademarks.
In addition to the example of vehicles, other physical assets that could be divided based on common law property rules include real estate (such as first and second homes, rental properties, land, and construction not used for day-to-day living, such as docks and boathouses). Also on the list are valuables such as art, antiques, and collectibles.
Physical assets are only one type of wealth, of course. There are also intangible assets, which include such things as brand names, patents, trademarks, leases, computer programs, customer lists, franchise agreements, and so forth. Intangible assets also are subject to common law or community property rules, although they tend to be associated more with companies and less with individuals.
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