Estate Planning Red Flag: Moving from a community property state to a non-community property state

You’re married and relocating from a community property state to a non-community property state, or vice versa

There are 10 community property states: Alaska (optional), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states (subject to certain exceptions) money earned and property acquired by either spouse during marriage belongs to the “community” — meaning each spouse has an undivided one-half interest (regardless of how property is titled). When one spouse dies, his or her share of community property goes to the surviving spouse unless a will provides otherwise.

Typically, property retains its character when you move from one state to another unless you take an action — whether intentional or not — that causes the character to change. For example, a married couple might use a marital property agreement to convert community property into separate property or vice versa, or to agree that income from separate property will also be separate property. Or a couple might unintentionally convert separate property into community property by commingling it with community property.

A common mistake made by couples relocating from community property states is to convert their community property into jointly held property. Community property offers a tax advantage: It generally is entitled to a fully stepped-up basis in the hands of a surviving spouse, so he or she can sell it without triggering capital gains tax. With jointly owned property, the surviving spouse receives a stepped-up basis on only half of the property’s value.

For couples who relocate to community property states, a potential trap involves “quasi-community property” —property that would have been community property if the couple had lived in the new state all along. Some states treat this property as community property, which can lead to unpleasant surprises.

When relocating, it’s critical to find out how a new state’s laws will affect your property rights. If necessary, modify your will or use trusts or other tools to ensure that your estate plan continues to operate as desired — or to take advantage of new options that weren’t available in your old state.

Please confirm that you understand the consultation is paid and the fee is $350.