Common law definition of property
What is Common Law Property?
Common law ownership is a system that most states use to determine ownership of property acquired during marriage. Unlike the community property system, which treats property acquired during a marriage as belonging to both partners, the common law property system states that property acquired by a member of a married couple belongs solely to that person, unless that the assets are specifically put in the names of both spouses. This theme becomes important in wealth management and wealth management following a divorce or the death of a spouse.
Key points to remember
- Common law ownership is a system that most states use to determine ownership of property, especially in divorce cases.
- In a common law property system, property acquired by one member of a married couple is deemed to belong to that person, unless it has been put in the name of both.
- Common law property contrasts with a community property system, which treats property acquired during a marriage as belonging to both partners.
Understanding Common Law Property
As an example of how a common law ownership system works, if a partner buys a boat, car, or other vehicle and puts only their name on the title, then that vehicle belongs exclusively to that person. If that partner lived in a state that recognized community property, the vehicle would automatically become the property of both marriage partners.
Only nine states recognize community ownership. They are:
- New Mexico
Three other states – Alaska, South Dakota and Tennessee – are “opt in” states for community ownership. Whether a state has a common law or community property system, the division of property in a divorce can also be determined by a prenuptial agreement or a postnuptial agreement if the divorcing couple has one.
The distinction between common law and common property law is important not only in the event of divorce but also in the day-to-day management of assets. For high net worth individuals in particular, a wealth manager may go to great lengths to determine legitimate ownership of certain assets, in common or community ownership situations. Wealth managers may also be involved in creating 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 law. common or community property.
Common law ownership rules can apply not only to tangible assets, such as cars, real estate, and fine art, but also to intangible assets, such as patents and trademarks.
In addition to the example of vehicles, other physical assets that could be divided based on common law ownership rules include real estate (such as primary and secondary residences, rental properties, land and buildings not used for everyday life, such as docks and boathouses). The list also includes valuables such as works of art, antiques and collectibles.
Of course, physical assets are only one type of wealth. There are also intangible assets, which include things like brand names, patents, trademarks, leases, computer programs, customer lists, franchise agreements, etc. Intangible assets are also subject to the rules of common law or community ownership, although they tend to be associated more with companies and less with individuals.