Community vs Common Law Property
Hi, Lee Phillips here. I want to talk to you about a concept,
or couple concepts, actually, called community property law and common property law. We have two different types of states
in the United States. We have community property states. We have common law states. The community property states are basically the states in the southwestern portion of the United States. California, Arizona, Texas, then we go up to Nevada and Idaho and Washington then we have Wisconsin it’s in the Western–no I don’t know how Wisconsin got to be a community property state. Of course Puerto Rico. These are the states which have basically
Spanish influence. Community property is a leftover, a remnant, of Spanish law. Everybody else in the United States basically all of our other laws are based upon British. Except Louisiana. They’re based on French law. And I’m not sure they even have laws down there–no. But at any rate, the community property states basically say husband and wife, marital, one economic unit. Common law states say
husband, wife separate units. That has a lot of ramifications. For example: in community property states, one spouse makes all the money. They bring it home. By law the other spouse owns it. It’s theirs. They spend it. In a common law state, one spouse makes the money. They bring it home. It’s theirs. End of discussion. They don’t have to give it to the other spouse. Now in my house, we give it all to the spouse anyway.
I understand that. But they’re different economic units. Another place that it comes into play heavily is asset protection. In a community property state, husband-and-wife, one unit. They own a rental unit.
The husband has bankruptcy in his business. Or he’s the doctor, he gets malpractice-d. Then they lose the rental unit because it’s “their” rental unit. He owns it. In a common law state, if one spouse owns the rental unit, the other spouse gets sued, commits the malpractice Then this spouse loses everything they have. The one that committed the malpractice
or had the problem. The assets of the other spouse they’re not subject to that problem. It’s not that spouses property. They can’t come and get it. If you get sued, they can’t come and get my property. Same concept. Husband gets sued, they can’t come and get the wife’s property. I live on hill on pill with thirty-some-odd MD’s in the two blocks around us. Go down to the title company. You can’t tell who owns those pieces of property. Now in some cases the non-professional spouse owns the piece of property. I can see that on the deed. But what they’ve done is they made it so that that piece of property is protected from the professional spouse’s malpractice issues. That’s a common law state. Community property states, we own
everything together. Now, there are some exceptions
to what we own together: Things that we brought into the marriage, I can keep his separate and hers separate. Inheritances.
I can keep his inheritance separate as his property. Not automatically her property too. So there are some exceptions there. Another major issue in it is in a common law state we own property jointly. Me and my wife. When my wife dies, her half gets a step-up in basis. A step-up in basis: we bought the house for $20,000 or the rental property, it’s now worth $100,000. We go to sell it next week, we pay capital gains on $80,000. Well, we own it jointly. So if she dies, her half gets a step-up in basis. It’s now worth $50,000. My half is worth $10,000. So we sell the house or the rental property next week for $100,000 We’ve got fifty plus ten, sixty… We only pay capital gains on $40,000. Over here in a community property state, My wife dies. The entire piece of property gets a step-up in basis. Good deal. I don’t quite see how they do that. Because haven’t you just penalized me by living in a common law state versus a community property law state when it comes to paying taxes after one of us dies? Yeah. So advantage: community property, everything gets the step-up in basis common-law property, only half gets a step-up in basis. Well, that’s reasonable. Over here, its all one unit. Over here, two units. So these are the concepts that you have to think about when you think about community property versus common-law. Another common question that I get is in limited liability companies. LLCs and we’ve got lots of audios, videos on LLCs But there’s a concept called multiple member LLCs which gives you charging order protection and you can see the videos on charging order protection. But, can husband-and-wife be two separate
owners of the LLC? So that we get charging order protection in California? And the answer is no. In California,
husband and wife one. Common law state. Utah? Yeah, I can own part of the LLC,
she can own part of the LLC. We are different legal units. So it has advantages and disadvantages depending upon which state you’re in. You know if you’re living in a community property state. You probably don’t know, really never thought about it, if you’re living in a common law state because that’s what most people live in. But it’s an interesting concept and one that you need to be aware of particularly if you’re in this community property law situation. This is Lee Phillips. Hopefully that gives you a little explanation of the difference between common law and community property law.