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Estate Planning: The Role of Community Property

By: Morris Law Group

When discussing your estate plan with your attorney, make sure to mention if you have either lived, or acquired property in a community property state. Community property laws apply to the interests of each spouse in property that was attained during marriage while living in a community property state. Further, community property retains its community property character even after someone has moved out of the community property state.

            Currently, there are nine community property states that include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska and Tennessee are states that have adopted an elective community property system. As dictated by community property laws, both spouses have a vested, equal, undivided interest in community property. All property that was acquired during marriage by both spouses while living in a community property state is presumed to be community property. Community property states allow spouses to enter into premarital and post marital agreements that dictate their rights in property. Importantly, proceeds and income from community property is also considered community property.

            Not all property acquired in a community property state is considered jointly owned by both spouses. Property that was acquired before marriage or by a “gift, devise or descent”, is considered separate property. Spouses are free to determine that certain property is separate property, and can convert community property into separate property and vice versa.  State law will dictate the status of community property as spouses may move between a community property state and a common law state.

            One of the major income tax components of community property is that both the decedents and surviving spouse’s one-half interest receives a step up in basis for community property included in the deceased spouse’s gross estate. This full step up in basis does not apply to separate property that is owned in a community property state.

As Alaska has an elective community property system, some planners choose to take advantage of Alaska community property trusts which treats the assets held by such trusts as community property.  As such, the assets held in the trust will enjoy the double step up in basis after the death of the first spouse. To qualify, an Alaska community property trust must appoint an Alaskan citizen, Alaskan trust company, Alaskan bank or other qualified individual according to Alaska law as a trustee. Similarly, Tennessee also allows spouses to create community property trusts, if they are not Tennessee citizens.  These community property trusts must have at least one qualified trustee and both spouses must sign the instrument.

In conclusion, if you have either lived in a community property state or owned property there, it is important to convey that information to your advisor when creating your estate plan.

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