In a common law state (like New York State), an individual whether married or single, is a separate individual with separate legal rights to property and separate tax obligations. Common law states are typically referred to as “separate property” states.
In a community property state (like California) a married couple each owns an undivided one-half interest in the “community" property.
There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska is an opt-in community property state that gives both parties the option to make their property community property.
Two states, Alaska and Tennessee allow non-residents to establish a community property trust with a trustee in their state.
Once property is characterized as community property (unless the property owner intentionally changes its character) it retains its character as community property for tax and legal purposes.
In community property states, property acquired before marriage is the acquiring spouse's separate property. Property acquired during marriage is presumed to be community property unless the property was acquired: (1) by gift, devise, or descent; or (2) with the separate property or separate credit of one of the spouses.
Some community property states include in their statutory definition that property acquisition must be by a married couple domiciled in that state when the property was acquired. (Washington, California, and Alaska). Other states define community property as not being separate property. The implication in those states is that property is not community property if the married couple acquiring the property was domiciled in a separate property state when the property was acquired.
Generally speaking, if either spouse owns separate personal property in a "separate property" state, that property maintains its character as separate property when brought into a community property state. A couple can take an affirmative step pursuant to the law of the community property state to obtain community property treatment.
Generally speaking, if community funds are used to purchase real estate in a "separate
property" state, community property jurisdictions will recognize the community nature of the real estate, even if the common law property state will not. So-called "quasi-community property" laws have been promulgated in some community property states such that separate property acquired outside the state will be treated as if it were community property for certain purposes.
Stepped-up Basis Advantage
The surviving spouse receives a stepped-up basis in both the decedent’s one-half interest in community property as well as the surviving spouse’s one-half interest. This rule applies if at least one-half of the whole of the community interest is includible in the decedent’s federal (estate tax) gross estate.
Attorney Adler focuses his practice on estate planning, wills, trusts and estates. He can be reached at 212-843-4059 or 646-946-8327.