Does Community Property Law Promote Equity or Efficiency?

community property law promote equity or efficiency?

Everything that a husband and wife possess together falls under Community Property. This normally includes all the debts incurred, money earned and all the property attained during the marriage period. The following are classified as the joint property of a married couple by community property states: (a) any income obtained during the marriage by either spouse; (b) any personal property or real property attained through the income earned during the period of marriage- it includes home, vehicles, appliances, furniture, luxury items, etc.; - any debts acquired in the course of the marriage. Under the law of community property, everything is owned as well as owed by the spouses immaterial of the fact as to who has spent or earned the income. ("The Ins and Outs of Community Property Law," n. d.)

Traditionally, eight states followed the law of community property system for marital property. These were California, New Mexico, Nevada, Texas, Arizona, Louisiana, Idaho and Washington. The first five states were Mexican territories at one time; the Spanish influence in that country was the primary reason as to why the laws of those states embedded community property. Wisconsin became the 9th community property state in 1984, when it passed the Uniform Marital Property Act. Among the community property states the basic principles are consistent but still significant differences exist in the case law and statutes of these states. There are certain things which the couple should be clear about if they get married in a community property state. (Gregory; Richards; Wolf, 2003)

Discussion:

We need to understand whether community property law promotes equity or efficiency.

Separate property: Generally each spouse would have some "separate property" over and above the "community property." Separate property comprises of each spouse's property which they have got before the wedding as well as the income obtained from this property even though the income may be earned by them after the wedding. Separate property also includes the gifts which are received by one single spouse. However, in certain states, community property also encompasses the family residences even though it one spouse's gift and that spouse has the title in his/her name only. Furthermore, for converting separate property into community property one spouse would have to donate the separate property owned by him/her to the community property of the couple. (Lawyers Attorneys, 2007)

Real Estate: The form of ownership assigned to real estate is generally retained by it. In a community property state, the real estate which either spouse acquires while during the course of marriage may be treated to be community property, without taking into account the residence or domicile of the spouses. Whether the income obtained from the real estate is to be treated as community property is determined by the law practiced in the location where the real estate is situated. (Shenkman, 2003)

Community property vs. Joint tenancy: If the characteristic of the property is altered by amending its title to "joint tenancy," then the principles governing joint tenancy takes precedence over the principles which govern community property. Although the spouse who survives maintains his/her legal share of the community property as governed by the state law, the spouse who survives will have to bear the loss of the stepped-up valuation under the IRS (Internal Revenue Service) rules. Hence it leads to a difference in the tax implications if the property is held under community property vs. joint tenancy. (Abts, 2002)

Community property system vs. common law marital property system: There are certain significant differences in both the systems. The main difference is with regard to the time at which marital interest is attached to the property. In the system of community property, each spouse is given a present, one-half, and vested interest during marriage in the entire community property when it is obtained. As a consequence, a non-acquiring spouse, in some states, can have the power during marriage to manage the community property. One spouse's ability to make an endowment of community property during marriage without taking the other spouse's consent is limited. When marital property is obtained under the common law systems, it does not entail immediate attachment of marital interest. The spouse who acquires the property during marriage, has got exclusive management power over it, and can also give it away without acquiring the other spouse's consent. (Oldham, 1987)

Community property systems and divorce: The differences between both the systems generally disappear when there is a filing for divorce. Many of the marital property systems grant that both the spouses have an unconditional interest in the entire marital property. The rules regarding divorce property division under the community property states and the common law marital property states are similar. All states, which follow community property, except for one state, permit the divorce court to divide between the spouses only their "community property"; they do not permit division of "separate property." In some of these states there must be equal division of the community property. However, most of these states permit that the division of the community estate is equitable. (Oldham, 1987)

Community property and inequities of income splitting: Though the source of income splitting inequities can be traced back to the law of community property, there are some interesting crinkles in the history of this law. It is sometimes considered that community property law is more "pro woman" as compared to the common law. This law recognizes the wife, at least in theory, as a partner in marriage, whereas, the common law concept of covertures, made the woman her husband's dependent. As one U.S. judge has said that, "in the theory of community property, the accretion of property during marriage are the product of the activities of not only the titular breadwinner but also that of the wife." Adopting the principles of community property may be taken as recognizing the value of household production, at least whilst comparing the contributions made by the husbands and wives to the marriage. However, the notion of valuing household production outside the household, by comparing the capability of households, which had a homemaker, and which did not have a homemaker, was not accounted for. In the states of community property, the legal claim of homemaking wives to half of the income of the household, did not necessarily mean, that during the marriage, they gained economic power in actuality. The husband was still vested with the power for managing the community property. (Nel, 1995)

Community property and creditors: The bond of community property can linger between the spouses for many years even after divorce. The debts which originally occurred during the course of marriage are the responsibility of both the spouses even after divorce. If a petition for bankruptcy is filed by an ex-spouse, the creditor can collect it by reaching a non-exempted "formerly community property" if the debt had occurred under the community debt. Hence, the debt could be collected from the other spouse at his/her expense, which would be beneficial to the spouse claiming bankruptcy. Property received in the divorce settlement by either spouse, if it was "formerly community property," can be deemed to be as assets which may be used to clear up the community debt which was incurred during marriage. ("Family Law - Divorce Law - Community property," 2008)

Community property and death of spouse: With regard to states of 'community property' whatever is earned during the marriage period and whatever is bought from those earnings is deemed to be community property and both the spouses have equal rights over it. In the event of the death of a spouse, if the property is in the name of the deceased spouse, the half property which he owns goes to the surviving spouse, unless mentioned otherwise in his/her will. A beneficial way of holding the community property's title is offered by some community property states, which helps to avoid probate at the event of death of the first spouse. This is known as "community property with right if survivorship." ("Married Couples: Who Owns What?," 2008) Further if a couple has title ownership to some property under this manner, then on one spouse's death, the property is automatically passed on to the surviving spouse without undergoing any probate court proceedings. ("Married Couples: Who Owns What?," 2008)

Conclusion:

Hence, taking into account all the above, we can see that community property law promotes equity as well as efficiency but with certain drawbacks. Division of property in case of death of spouse or divorce can be easily settled in the case of community property since everything acquired by the couple during marriage is deemed to be community property and is to be divided equally. This ensures that neither of the spouses is at a loss since the separate property is not included in the community property, so there is not any unfair division. However, the only drawback is in the settlement of community debt, since the community property is treated as an asset for settling all such…