Common Law Property: Definition and How It's Used in Divorce

What Is Common Law Property?

Common law property is a system that most states use to determine ownership of property acquired during marriage. In contrast to the community property system, which treats assets acquired during a marriage as belonging to both partners, the common law property system states that property that one member of a married couple acquires belongs solely to that person unless the property is specifically put in the names of both spouses. This theme becomes important in wealth management and estate management following a divorce or death of a spouse.

Understanding 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.

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.