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How can we protect our assets if we live in a community property state?

There are nine community property states. Community property includes all marital assets. There are also separate assets; those acquired by either spouse through gift or inheritance, acquired before marriage, or specifically partitioned by the spouses into separate property. The community property laws don't protect marital assets from creditor claims against one spouse; however, separate property of the non-liable spouse is generally sheltered from claims against the other spouse if the debt didn't benefit both spouses. Generally, it is wisest to protect both community property and separate property through other means.

A married couple may partition and separately own assets in a community property state via a transmutation agreement. A transmutation agreement is a type of post-nuptial agreement wherein each spouse agrees to keep their own property separate and outside the community estate. A well-drafted transmutation agreement thus supersedes community property law. When drafting a transmutation agreement, each spouse should retain separate counsel and have full disclosure of the agreement's ramifications in order to prevent the agreement from later challenge. If one spouse is particularly vulnerable to creditor threats, a transmutation agreement allows the less vulnerable spouse to separately hold assets, which may provide some asset protection if it is done before the more vulnerable spouse has creditor problems. There are, however, some potential downsides to this solution.

The community property law of some states actually increases one's likelihood of losing marital assets to creditors. Some states allow a creditor to claim all community assets to cover the debts of either spouse. In contrast, a few states' community property laws actually provide limited protection. For example, Arizona allows a debt acquired by either spouse prior to marriage to be satisfied from community property, but only to the extent of the value of that spouse's contribution to the community that would have been such spouse's separate property if he or she were single. In contrast, an unsecured debt acquired during marriage may not be satisfied from community property. Nevada allows a spouse's separate debt to be satisfied from community property, but only if the wife acquires debt because the husband didn't provide for her necessities. Such a debt can then be satisfied from any community property, or from the husband's separate property. In Texas, only tort debts, not contract debts, may be satisfied from community property, but if the debt arises from a tort, then it may be satisfied from any and all community property. The same can be said for tort debts in Washington, except they may only be satisfied from the debtor's half of community property. On the other hand, California, Louisiana, Idaho, New Mexico, and Wisconsin allow a separate debt acquired by either spouse during marriage to be satisfied out of any community property.

As you can see, each state's community property laws have important differences in the construction or interpretation. If you live in a community property state, you should review with your attorney precisely how your state laws work. Focus on what specific rights creditors have to claim both community and separate property. We necessarily speak in generalities. Your community property state may follow somewhat different rules.

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The Presser Law Firm, P.A. - Asset Protection Attorney
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