Moving to or from a Community Property State – How it Effects Your Estate Plan
In today’s world, many people will move from state to state several times over the course of a lifetime. Such moves can have significant impacts on your estate plan. One of the ways it can have an impact is when a married couple is moving to or from a community property state to a non-community property state. Community property is a way married couples hold property jointly in certain states. While the particular rules can vary from state to state, currently nine states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) have a presumption that property acquired during the marriage is community property. Alaska allows married couples to “opt-in” to community property treatment. The location of the property itself is not the determining factor, rather the determining factor is where the marriage was domiciled at the time the property was acquired. Therefore, a cabin, located in Utah, purchased by a couple residing in a community property state such as Idaho or Arizona, will generally be characterized as community or quasi-community property. Likewise, a winter home in Arizona, purchased by a couple in Utah, will not receive community property treatment even though it is located in a community property state because the marriage is not.While there are many pros and cons to holding property as community property, one of the major benefits is that upon the death of the first spouse all community property gets a 100% step-up in income tax basis. In non-community property states that step is only equal to the deceased spouse’s interest in the property – normally 50% in jointly held assets. This can result in major income tax savings upon the sale of an asset following the death of the first spouse to die.The common law or statutory rule in most states is that the characteristic of the property as either community or joint marital property does not change when the domicile of the marriage changes. It retains its character as community property or joint marital property in the new state of domicile. Thus property a couple purchased while living in Idaho continues to be community property when they move to Utah. However, once a couple moves from a non-community property state to a community property state, they can change or transmute the property they own jointly to community property by agreement. Likewise, the parties can change or transmute community property to joint marital property by agreement when they move to a non-community state.Unfortunately, a couple may also unintentionally change community property (or the proceeds of community property) to joint marital property when moving to a non-community property by taking certain actions. For example, in Utah, the proceeds of the sale of community property remain community property. If the couple sells a parcel of land held as community property in Idaho, move to Utah, and then purchase a new parcel of land in Utah with the proceeds of that sale, the new Utah land should still be treated as community property. Unfortunately, because most lawyers, title companies, etc. in non-community property states don’t generally deal with community property, the newly purchased land may be titled in the couples names as joint tenancy property with rights of survivorship. In fact, in Utah this is the presumption for a husband and wife even if those magic words aren’t included. Because of this titling decision or defaulting, the property has been inadvertently changed from community to joint marital property and the associated potential 100% step-up has now been reduced to 50%, potentially resulting in greater taxes at the time of sale.The moral of the story, as always, is that when you move to a new state you should have your estate plan reviewed by a competent attorney who understands the impact of the move, not just from the vantage point of the laws of the new state, but also from the vantage point of the laws of the state you are leaving. Thought and care should be used in deciding to change the status of how property is held by the married couple.