Gerald B. Treacy, Jr.

This article was prepared for educational purposes only and may or may not reflect the most current legal developments. All sample provisions herein are for illustrative purposes only and do not constitute a representation or warranty of their appropriateness or suitability for any purposes whatsoever. These materials are not legal advice, and persons should consult an attorney for legal advice pertinent to his or her situation. Individuals seeking clarification should contact Gerry Treacy.

Planning for Community Property: A Primer for the Other 40½ States

For otherwise savvy planners practicing outside the community property states – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and since 1998, Alaska, under a nonmandatory “elective” regime [1] – community property is often the largest “blind spot” in their practices. Although no one seems to keep statistics about this sort of thing, it would not be at all surprising to learn that practitioners in the “other” 40½ states (which Westerners generally refer to as the “common law” states) regularly destroy the significant advantages afforded by their migrating clients’ community property holdings. Community property’s felicitous “built-in” estate equalization properties, the opportunity it affords for fractional interest discounting, and, above all, the “double basis step-up” afforded both spouses’ halves of community property at the death of the first spouse [2] (at least until 2010 [3]), are easily shattered through less than careful planning. Fortunately, with a little focus and some small effort, this loss can be avoided.

Community property is a form of ownership under which each spouse owns a present, equal undivided interest in each asset. While the various state community property regimes differ from one another in many particulars, most share some common principles: (1) property acquired during the marriage, as well as the rents, issues, and profits as to such property, are generally community property [4]; (2) property owned prior to the marriage, or acquired during the marriage by gift or bequest, is generally separate property, of which both “halves” are owned by one spouse [5]; and (3) if there is any doubt as to the character of a particular asset owned during the marriage (as for example if there has been “commingling” of separate assets with community assets), there is a relatively strong presumption that the asset is community property [6]. The fact that record title reflects only one spouse’s name, or indicates a different form of ownership, in general does not defeat this presumption. [7] At death, each spouse is usually entitled to dispose of his or her half of the community property as he or she may wish; the surviving spouse usually does not have an enforceable right to receive the deceased spouse’s community property interest (except in cases of intestacy or when the parties have executed a “community property agreement” providing for “automatic” ownership of both halves by the surviving spouse upon the first spouse’s death). “Widow’s election” wills, under which the first spouse makes provision for the surviving spouse on condition he or she elect against rights in his or her half of the community property, present special problems. Upon dissolution of the marriage, the respective halves of the (formerly) community property are generally to be awarded to each spouse respectively, or at least this is often the starting point in the court’s analysis. Increasingly, community property-like principles are being applied to “meretricious” relationships between unmarried couples. [8] As might be surmised, these are broad generalizations, all of which are subject to exceptions and conditions which tend to vary widely from state to state.

Page 1