Community Property vs. Equitable Distribution Doesn’t Mean What You Think

When people search for community property vs equitable distribution, they are usually trying to predict how their divorce will be divided.

That assumption is understandable, but it’s often wrong. In high-asset divorces, relying on that framework alone can become a six-figure mistake.

The conventional wisdom is simple:

• In community property states, everything is split 50/50.

• In equitable distribution states, assets are divided “fairly.”

  
  

Both ideas are oversimplifications. And in divorce, oversimplifications are expensive.

In more than two decades of working on high-net-worth divorces, the most costly mistake I see is this: assuming your state’s label tells you how your divorce will actually unfold.

It doesn’t.

Same profession. Same asset. Completely different outcomes.

Two of my clients—both orthodontists with comparable practices, comparable revenue, and comparable patient bases—experienced vastly different financial results in divorce.

The Florida orthodontist was able to protect practice goodwill entirely after recent case law developments clarified that personal goodwill is treated as separate property.

The North Carolina orthodontist, by contrast, was required to include the full value of practice goodwill in the marital estate, because North Carolina currently treats all goodwill as marital property.

Both equitable distribution states. Completely different treatment of the same asset type. Hundreds of thousands of dollars at stake.

And even that distinction may not be permanent. A case currently pending before the North Carolina Supreme Court could reshape how goodwill is treated statewide.

This is the reality most people miss: divorce outcomes vary not just between community property and equitable distribution systems, but within them, based on state-specific case law and how particular assets are characterized and valued.

Where you divorce sets the baseline. How your state interprets the rules for your asset structure determines the outcome.

The Community Property vs. Equitable Distribution Divide

Community Property States

There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

The presumption is straightforward: assets acquired during the marriage belong equally to both spouses. This typically includes:

• Income and earnings

• Retirement contributions

• Business growth

• Real estate equity

  
  

But “50/50” is not automatic, and it is rarely simple.

Each community property state has its own rules governing:

• What qualifies as marital versus separate property

• How tracing requirements are applied

• What happens when separate and marital funds are commingled

  
  

This is where disputes arise, particularly for business owners and professionals with complex asset structures.

Equitable Distribution States

The remaining 41 states follow an equitable distribution model.

Here, assets are divided “fairly,” not necessarily equally. Courts may consider factors such as:

• Length of the marriage

• Income disparity

• Contributions to the household

• Future earning capacity

  
  

The result could be:

• 50/50

• 60/40

• 70/30

  
  

“Fair” is inherently subjective. And subjectivity means outcomes are shaped by facts, documentation, expert testimony, and financial clarity.

For high-earning professionals, equitable distribution can create either risk or opportunity—depending on preparation.

Why State Labels Create False Security

Community property and equitable distribution are only starting points.

Every state (regardless of framework) has its own rules governing:

• What is classified as marital property

• What remains separate

• How businesses and professional practices are valued

  
  

This is where high-net-worth divorces become expensive quickly—and where I see the most damaging blind spots.

I refer to this as the State Label Trap: confusing a state’s classification system with how that state will treat your specific assets.

Knowing you live in a community property state doesn’t tell you:

• Whether professional goodwill is divisible

• How inherited funds used in a practice buy-in will be traced

• Whether post-separation business growth is marital

• How passive versus active appreciation is treated

  
  

Assumptions in divorce are costly. Precision is not.

The Goodwill Issue That Changes Everything

Goodwill represents the value of a business or professional practice beyond its tangible assets. It includes:

• Reputation

• Referral relationships

• Client or patient base

  
  

In many professional practices, goodwill is the largest component of total value.

States treat goodwill very differently:

• Some distinguish between personal goodwill and enterprise goodwill

• Some include all goodwill in the marital estate

• Others recognize the distinction but apply it inconsistently

  
  

For a medical practice valued at $2 million, with $800,000 attributed to goodwill, this difference is not theoretical.

It can mean a $400,000 swing in settlement exposure.

Three Questions Every State Answers Differently

Effective divorce financial planning depends on understanding how your state addresses three core issues:

1. Marital vs. Separate Property

What qualifies as marital property? How strictly are tracing rules enforced? What happens when separate funds are used for joint purchases?

2. Business and Practice Valuation

How aggressively is goodwill included? Are valuation discounts applied? What methodologies do courts prefer?

3. Division Factors

In equitable distribution states, which factors meaningfully influence outcomes?In community property states, what circumstances justify deviation from equal division?

The answers vary widely—even among states using the same legal framework.

The Bottom Line

Community property and equitable distribution are frameworks—not formulas.

Your divorce outcome is shaped by:

• State-specific case law

• Asset complexity

• Financial strategy and modeling

  
  

The real question is not simply which system your state follows.

It is: How does your state apply that system to assets like yours—and how do you evaluate that before negotiations begin?

That is where divorce financial strategy begins.

Next Steps

For physicians, business owners, and high-earning professionals, divorce outcomes are rarely determined by labels alone. They are determined by preparation, modeling, and clarity.

At Ever After Wealth, we work with clients nationwide to model how their specific assets will be characterized and valued under their state’s rules before they are negotiating blind.

If you are navigating divorce and need clarity around complex assets, you can learn more at: https://www.everafterwealth.com

In upcoming articles, I will be exploring:

• Why “50/50” in community property states is often misleading

• How equitable distribution turns “fair” into a moving target for professional practices

• What pending case law developments could mean for goodwill nationwide

Schedule Your Strategy Session HERE  

Your divorce is the largest financial restructuring of your life. Protecting it requires specialized expertise that most divorce professionals are not trained to provide.

About the Author: 

Gabriella E. Martinelli, CDFA® CDS® NCMP®, is the founder and private divorce financial strategist at Ever After Wealth®, specializing in wealth protection during divorce for high-net-worth individuals. With more than 22 years of experience identifying financial blind spots, she is known as the architect of divorce strategies that protect legacy, wealth, and long-term financial security.