Why Worry About Community Property?

Community Property-842609122

In the United States, there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Additionally, Alaska, Tennessee and Puerto Rico are elective community property jurisdictions.

If you are reading this and you do not reside in one of these states, you might have thought to yourself, “I am so glad I can skip this and get back to today’s crossword.”  But whether it’s for a career change, retirement or other reason, community property laws will affect your estate planning if you have lived in or relocate to a community property state at some time in your life.

What are Community Property Laws?

Community property laws are designed to simplify the question of who owns what assets, and debts, in a marriage (in California this may include registered domestic partnerships). What follows are the general principles of community property, however, reader beware that the details may vary depending on state and local law.

For a married couple living in a community property state, all of their assets can be divided into three categories:  one spouse’s separate property, the other spouse’s separate property, and the community property of the couple.  Separate property includes assets acquired by one spouse prior to marriage, or during the marriage by gift or inheritance.  Community property consists of assets accumulated during the marriage through the efforts of one or both spouses.  The best example of community property is earnings from employment.  The classification of an asset as separate or community property carries over to income received from that asset, the proceeds of sale of that asset, and any new asset acquired with the original asset or its income or proceeds (for example, earnings from employment used to purchase a house).

The significance of separate and community property to estate planning is that each spouse has the right to direct the disposition at the spouse’s death of his or her separate property and one-half of the couple’s community property.  The corollary of this rule is that the surviving spouse is the owner of the other one-half interest in the community property.

Is That Really All There Is to It?

Just like every other question in law, there is always more to it.  This is especially true when couples make a new state their home.

There is an additional category of property in community property states called quasi-community property.  Quasi-community property assets are those assets acquired during marriage prior to moving to a community property state. Once residence in a community property state is established, any property already acquired will be treated as either community or separate property.  The status of such property is determined as if the property had been acquired in a community property state.

For example, if a married couple lived outside of a community property state during their marriage, and had any earnings, bought any real estate or acquired any other type of property with those earnings that in a community property state would be community property, that property is called quasi-community property. Quasi-community property, in most respects, is treated like community property for purposes of legal separation, divorce and estate planning.

Ok, That’s All, Right?

Well, just one more thing.

Several non-community property states have adopted laws that preserve the rights of each spouse in property which was community property prior to a change of domicile to a non-community property state. Almost like quasi-community property in reverse, the soberly named and easy to remember Uniform Disposition of Community Property Rights at Death Act (the “Act”) is designed to do just that. If you move from a community property state to a non-community property state that has adopted the Act, the community property character of your community property is retained for estate planning purposes in your new home state.  Examples of states that have adopted the Act are New York and Florida; Georgia, however, has not adopted the Act.