Uniform Act Cathy Woo, Pier 57

Gerald B. Treacy, Jr.

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

Once the planner has identified community property assets among the clients’ holdings, the next step is to determine how such assets are treated under the law of the new non-community property state. A growing number of common law states have adopted some version of the Uniform Disposition of Community Property Rights at Death Act. In essence, the Uniform Act provides that, on the first spouse’s death, only that spouse’s one-half interest in the community property assets is subject to the decedent’s testamentary disposition, free of election, dower, or curtesy rights of the surviving spouse. [12] Property not originally community property, but transmuted into community property by spousal agreement, is also subject to the Uniform Act. [13]

In jurisdictions which have not adopted the Uniform Act, planners may be tempted to “resolve” community property questions by having the couple sign a spousal agreement, converting their assets to co-tenancy, an ownership regime more familiar to the common-law state planner. This course is not recommended, as it will likely sacrifice the valuable double basis step-up in both halves of the community property under Code Section 1014(b)(6), in addition to defeating other potential rights and expectations of the two spouses. Simply re-titling assets as tenancy-in-common assets is inadvisable. [14] Instead, the planner should consider any one or more of the following: (1) most simply, memorializing the community property character of the assets via a memorandum or agreement; (2) placing the community property assets in a discrete brokerage account, identified as community property in the ownership documents or in a side memorandum or agreement; or (3) creating a revocable inter vivos trust to be funded with the community property assets, and selecting the law of a community property state as the trust’s governing law.

The 1998 Alaska legislation creates another opportunity for preserving the community property of migrating clients. The Alaska Community Property Act permits non-Alaskans to create a “community property trust,” so long as an Alaskan bank or trust company is named as trustee or co-trustee. [15] The hope is that the assets held in such a “community property trust” will qualify for the double basis step-up at the first spouse’s death. Of course, the Alaska legislation might also tempt planners whose clients have had no connection whatever with community property states, to recommend creation of a “community property trust,” to strive to achieve the same advantages available to those lucky enough to reside in a community property state.

FOOTNOTES:

  1. Community Property Act, Alaska Stat. Ch. 34.77.
  2. Internal Revenue Code (“Code”) Section 1014(b)(6).
  3. Code Section 1014(f).
  4. See, e.g., Wash. Rev. Code Section 26.16.030.
  5. See, e.g., Cal. Fam. Code Section 770(a).
  6. See, e.g., Tex. Fam. Code Ann. Section 3.003.
  7. See, e.g., Kitchens v. Kitchens, 407 S.W.2d 300 (Tex. Civ. App. 1966).
  8. See, e.g., In re Marriage of Lindsey, 678 P.2d 328 (Wash. 1984).
  9. See, e.g., N.M. Stat. Ann. Section 40-3-8(C).
  10. Hisquierdo v. Hisquierdo, 439 U.S. 572 (1979).
  11. Boggs v. Boggs, 520 U.S. 833 (1997).
  12. Uniform Disposition of Community Property Rights at Death Act, Section 3.
  13. Uniform Disposition of Community Property Rights at Death Act, comment to Section 1.
  14. See Rev. Rul. 68-80, 1968-1 C.B. 348 (loss of double basis step-up for realty titled as tenants in common).
  15. Alaska Stat. Section 34.77.100(a)(2), (3).
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