In most states, spouses can purchase and own property separately from one another. I’d like to think that when I buy a bag of Zapp’s Crawtators that they belong to me and only me, even if I bring them home and put them in the pantry. However, in certain states – called community property states – if one spouse purchases property, it is considered the property of both spouses. The state of Louisiana rules that I have to share my chips. More importantly than snack foods, how marital property is owned has implications for both estate and tax planning.
Currently, only nine of the fifty states are community property states. They are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. A few other states (for example, Alaska) allow couples to opt into community property arrangements.
Community property is property acquired by a couple during marriage. In community property states, property held in only one spouse’s name can still be community property. For example, the paycheck that a spouse brings home every week is community property even though only one spouse’s name is on the check. If that check is used to buy an asset, then that asset is community property, regardless of whose name is on the account or the asset.
Property that is not community property is property that one spouse brings to the marriage, inherits, or is gifted. A spouse can turn separate property into community property by putting an asset owned by one spouse into both spouses’ names.
Depending on the state, partners may be able to change whether property is separate or community via pre-nuptial agreement, post-nuptial agreement, or exceptions in the law. Changing community property into separate property may be appropriate in second marriages or when one spouse is bringing significant separate property into the marriage. For example, if, at the time of the marriage, one spouse receives significant income from owning a business, the spouses may decide that it is appropriate that the business remain that spouse’s separate property and the income from that property will remain that spouse’s separate property.
One advantage of community property is with regard to capital gains taxes. If one spouse dies, the cost basis of the community property gets “stepped up.” The current value of the property becomes the cost basis. This means that if, for example, the couples’ house was purchased years ago for $150,000 and it is now worth $600,000. The surviving spouse will receive a step up from the original cost basis from $150,000 to $600,000. If the spouse sells the property right away, he or she will not owe any capital gains taxes. In non-community property states, if one spouse dies, only the deceased spouse’s interest (usually 50 percent of the value) is stepped up.
When estate planning in a community property state, it is important to fully review assets to determine which assets are community property and which are separate property. A surviving spouse in a community property state is entitled by law to half of the community property, regardless of what the spouses may have wanted to do with the property (such as pass it on to children). Community property can be a factor even in non-community property states if the couple owns property in a community property state.
If spouses move from one type of state to another, it is especially important that they have their estate plan reviewed by an attorney in the new state to make sure the plan still does what they want. A knowledgeable estate planning attorney will be able to advise you on the best way to plan for your property, assets, and, of course, your chips.
The information provided is not intended to be legal or tax advice and does not constitute any attorney/client relationship. You should consult with an attorney for individual advice regarding your own situation.
Ms. Melancon is an attorney with Legacy Estate & Elder Law of Louisiana, LLC with offices in Baton Rouge, New Orleans and Lake Charles, LA. The primary focus of her practice is estate planning, probate, special needs planning, and elder law. For more information or to attend an upcoming estate planning seminar, call her office at (225) 744-0027.