Community Property. Community property is everything that a husband and wife own together. Nevada is a community property state. This means both the husband and wife equally own all money earned by either one of them from the beginning of the marriage until the date of separation. In addition, all property acquired during the marriage with “community” money is owned equally by both the wife and husband, regardless of who purchased it. Like community assets, all debts contracted from the beginning of the marriage until the date of separation are community debts. Therefore, each spouse is equally liable for debts.
A full list of the community property states is as follows: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In all other states, property belonging to married persons would be characterized as separate property.
Separate Property. On the other hand, separate property is everything a husband and wife own separately. Separate property does not need to be divided between the spouses. In most cases, separate property includes: (1) Anything owned prior to marriage; (2) Anything inherited or received as a gift during the marriage; and (3) Anything either spouse earned after the date of legal separation or divorce.
Separate property can also include anything that one spouse gives up to the other spouse in writing. In certain cases, separate property can become commingled with community property. Similar to separate property, separate debts belong to one spouse. All debts incurred before marriage are separate debts. For example, educational loans or job training loans incurred before marriage would be separate debts.
Property considerations with a living trust. When a married couple establishes a living trust, it is very important for them to delineate and decide amongst themselves what the character of their property is, whether it is separate or community property. Upon death, the separate property belonging to the deceased spouse only, is stepped-up in value to the fair market value as of the date of death.
The surviving spouse’s separate property is not stepped up. Whereas one hundred percent of the community property receives the step-up in basis. While many other very significant considerations should be worked through when determining the character of separate and community property (e.g., the strength of the marriage, asset protection issues, and issues related to having children from prior marriages, just to name a few) definite income tax benefits might be realized through proper characterization of a married couple’s assets.