estate and tax planning

How Community Property Affects Estate and Tax Planning

How marital property is owned has implications for both estate and tax planning. In most States, spouses can purchase and own property separately from one another. However, in certain States – called community property States – if one spouse purchases property, it is considered the property of both spouses.

There are currently nine 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. 

What Is Community Property?

Community property is property acquired by a husband and wife during marriage. In community property States, property held in only one spouse’s name can still be community property and usually is. 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. 

Separate vs. Community Properties: Determining Your Assets

Property that is not community property is property that one spouse owned prior to the marriage, inherits, is gifted, and certain personal injury recoveries. 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 also 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. 

How Community Property Can Help Save On Taxes

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. 

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. 

 

How The Law Office of Antoinette Bone Can Help

Whether you’re just looking to begin your Estate Planning or update your current Estate Plan, it’s always highly advisable to consult with an Estate Planning attorney.

There are many ways to configure an Estate Plan and it’s important to find a lawyer who can help you in creating and executing the ideal plan for you and your family. Antoinette Bone is an attorney located in Euless, TX, in the heart of the Dallas-Fort Worth Metroplex, focusing in the practice areas of Estate Planning, Elder Law, Guardianship and Probate.

At the Law Office of Antoinette Bone, we understand that no two family or personal situations are the same – that’s why we take a personalized approach with all of our clients. We look forward to helping you customize an Estate Plan that fulfills your unique needs and considerations. Click the link to book an appointment or call us at (817) 462-5454 to schedule a meeting in our office.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Nothing in this message is intended to provide legal advice.  This message is for educational purposes only.

 

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