For lawyers trained and practicing in the vast majority of states, community property is a little-understood concept. Often, the first reaction is to transmute it into the more familiar separate property. However, often this is doing the client a disservice.
Estate planning attorneys know that property gets a step-up in basis at death. One advantage of community property is that it gets a step-up in basis on both halves since the decedent owned a one-half interest in the whole property.
Thus, preserving community property can have significant tax advantages for the client. While only nine states are community property states, most states allow for the preservation of community property which is created in another state. They do so through legislation like the Uniform Disposition of Community Property Rights at Death Act or through common law. Restatement (2d) of Conflict of Laws, §§ 258, 259.
However, in order to preserve community property and not accidentally transmute it, one needs to recognize its existence. Property may be community property even though it is not neatly labeled as such. For example, a bank account may be titled: John Doe. However, that does not mean that the account may not be community property. If the property in the bank account came from wages earned while the couple lived in a community property state, its likely community property, notwithstanding the name on the account.
From a tax perspective, it is usually a good idea to transmute the property to community property, if possible. However, as when equalizing estates, you may want to think twice when the marriage is not a long-term one. Also, if the property value has declined since the original purchase, the client may be better off without the step-down in basis on twice the property.
I’ll be speaking on this and other topics at the American Academy of Estate Planning Attorneys’ upcoming Fall Summit in San Diego.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
Latest posts by Steve Hartnett (see all)
- Beneficiary Designations, etc., Aren’t a True Substitute for a Trust - February 19, 2019
- New Tax Proposals - February 12, 2019
- State Income Taxation of Nongrantor Trusts - February 5, 2019