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Community Property vs Common Law Property

To discuss Community Property In S.E. Michigan Only: Call 248-676-2233 to make an appointment with an attorney.

Among the questions I get regarding estate planning are inquiries about community property (CP)and common law property. In order to clarify the difference between the two, it would be best to begin with the legal definitions* of the terms.

CP: is all property that a husband or wife acquires by their joint efforts during their marriage. All property owned at the time of (prior to) marriage, or that was acquired by gift, devise, bequest, or descent, and the rents and profits therefrom is considered separate property. All other acquisitions arising from the earnings of either husband or wife during marriage constitute community property.

This system of concurrent ownership is applicable only to the ownership of property by husband and wife. The basic theory underlying this system is that a husband and wife both contribute to the property acquired after their marriage and should, therefore, share equally in the ownership of any interest resulting from their joint efforts.

Currently there are eight states that have adopted the Civil Law doctrine of community property. These states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin.

Some states that do not espouse this CP doctrine have adopted equitable distribution statutes to achieve a similar distribution of the marital estate upon the dissolution of the marriage.

Community property is similar to, but should be distinguished from, tenancy by the entirety and joint tenancy. This system of property ownership law is derived from Spanish law that existed in the early years of our country in the west and southwest. This doctrine has been adopted in several other states over the years.

Common Law: is the system of jurisprudence, which originated in England and was later applied in the United States, which is based on judicial precedent rather than statutory laws, which are legislative enactments. It is to be contrasted with civil law (the descendant of Roman Law prevalent in other western countries).

Originally based on the unwritten laws of England, the common law is “generally derived from principals rather than rules; it does not consist of absolute, fixed, and inflexible rules, but rather of broad and comprehensive principals based on justice, reason, and common sense. It is of judicial origin and promulgation. Its principles have been determined by the social needs of the community and have changed with the needs of such community. These principals are susceptible of adaptation to new conditions, interests, relations, and usages as the progress of society may require.” (legal citations omitted.)

What these terms mean for most folks is that, in Michigan, CP laws do not apply unless certain property acquired during the marriage was acquired under the laws of another state which recognizes that system of property ownership.

The defining feature of the states recognizing community property is that irrespective of the name or names on a title document, ownership of almost ALL property, including real estate, income from wages or self employment, acquired during marriage by either spouse is automatically split, so that each spouse owns a separate, undivided one-half interest in the whole of the real estate, property, accounts, cash, receivables, etc.

Under Michigan’s Uniform Disposition of Community Property Rights at Death Act (MCL 557.262) it is stated:

Section 2. This act applies to the disposition at death of the following property acquired by a married person: (a) Personal property, wherever situated which was acquired as or became and remained, community property under the laws of another jurisdiction; all or the proportionate part of that property acquired with the rents, issues, or income of, or the proceeds from, or in exchange for, that property; or traceable to that community property.

(b) All or the proportionate part of any real property situated in this state which was acquired with the rents, issues, or income of, the proceeds from, or in exchange for, property acquired as or which became and remained, community property under the laws of another jurisdiction, or property traceable to that property.

The result of this statute is that upon the death of a married person, one half of the property that was acquired in a CP state or any property in Michigan acquired with funds or proceeds from a community property state belongs to the surviving spouse and is not subject to a testamentary disposition by the decedent. The other one half of the property does belong to the decedent and is subject to testamentary disposition or distribution under the laws of Michigan.

Since the two equal halves of the property are separate, each spouse is free to bequeath his or her property in a Will or Trust. It does not automatically transfer to the survivor as it would if the property was jointly owned with full rights of survivorship.

Under Section 5 of the above act, If the title to property was held by the decedent at the time of death, title of the surviving spouse may be perfected by an order of the court or by execution of an instrument (deed) by the personal representative or the heirs or devisees of the decedent with the approval of the court.

So, who could be affected by CP laws? 1. Spouses who now live in a community property state, 2. Those spouses that now live in a common law state but acquired property or money while living in a CP state previously, and 3. Those spouses that now live in a CP state but acquired money or property while living in a common law state previously.

The bottom line: If either or both spouses is or ever was a legal resident of a CP state, then accurate records should be maintained regarding the estate of each individual spouse prior to the marriage, the state of the current marriage, the identity, value and source of funds used to buy property during marriage as well as the legal residence at the time of acquiring the property.

These factors will play a significant role in determining the rights of each spouse in any particular property. This is especially true for couples that retire and relocate to either Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin.

*Legal definitions taken from Barron’s Law Dictionary by Steven H. Gifis, Assoc. Prof. of Law Rutgers, The State University of New Jersey, School of Law Newark (1984).

Now that you understand Community Property, see Trusts