Gerald B. Treacy, Jr.

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

Among the important qualifiers which often affect clients migrating out of community property states, are issues of “quasi-community property” and federal preemption. Many of the community property states treat acquisitions made outside the state which would have been characterized as community property had they been made inside the state, as “quasi-community property,” treated as community property for specified purposes. [9] In contrast to this extension of community property principles, the doctrine of federal preemption works in the opposite direction, removing certain assets from the operation of community property principles. Among other federal enactments, the Railroad Retirement Act [10] and ERISA, [11] have been held to preempt community property laws.

An initial checklist item for the planner will be to ascertain whether the clients have ever resided in a community property state, and if so, whether they have ever signed a “community property agreement.” Such agreements, which may or may not have been recorded, are fairly common in some community property states, designed as they are to help remove some of the uncertainties inherent in the tracing and characterization principles applied in the various jurisdictions. A community property agreement may contain any one or more of the following provisions: (1) all property currently owned is characterized as community property (frequently with separate property exceptions scheduled); (2) all property which either spouse may acquire during the marriage subsequent to the date of the agreement is to be characterized as community property; and (3) at the death of the first spouse, all community property will automatically pass to the surviving spouse, without the need for probate administration. Those agreements containing only the first two of these provisions are commonly called “two-pronged” community property agreements and in general should be kept in place (though, after the couple moves to a common law state, the second prong will need to be reviewed); those agreements containing all three provisions, known as “three-pronged” community property agreements, can cause considerable mischief in taxable estates. While a “two-pronged” agreement can help preserve the advantages of community property, including estate equalization and the double basis step-up at the first spouse’s death, a “three-pronged” agreement, despite its potential advantages in helping avoid probate at the first death, has the distinct disadvantage of bypassing tax-savings provisions in the will or inter vivos trust and rendering them ineffective. Even in the absence of a community property agreement, of course, the clients may own community property, but usually cannot be relied upon to know whether or not they do; the planner must simply dig. Prior extended residence in a community property jurisdiction will often indicate the presence of items of community property.

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