Because community property laws affect ownership of your assets, they have a significant impact on estate planning.
To understand how community property laws will influence your estate planning decision, you must first know what these laws accomplish.
Community property laws declare every asset acquired during marriage to be jointly owned by both spouses. Even a business started by one spouse will be considered a 50-50 partnership under state law.
In states without these laws, like kansas and missouri, married individuals retain sole ownership of their earnings unless they choose otherwise.
If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin, community property laws will affect you.
A recent Barron article, titled “How Community Property States Are Different,” outlines important aspects of your finances to consider if you are moving to or from a community property state.
What are these aspects?
Did you acquire assets before you got married?
As long as you do not put those funds into a joint account after marriage, they remain solely yours.
Have you come into an inheritance (even after your wedding)?
Again, as long as you keep these assets separate from your joint finances, they belong to you alone.
Whether you want to keep these finances separate or combine them, an estate planning attorney can help you with the appropriate pre- nd post-marital agreements and even community property agreements.
There are some key difference in community verse individual property states. One example of such differences involves the assets with an accrued value.
For example, consider a home.
If you purchased the home after you were married in a community property state, then you would both equally share the property. If you purchased it for $1 million, but it was valued at $5 million at your time of death, then the entire property value—not merely your half—would get a step-up in basis.
What does this mean?
If the surviving spouse wanted to sell the property, then he or she would not pay capital gains taxes on his or her half.
On the other hand, the surviving spouses in a non-community property state would have their half of the home still valued at the original purchase price. Because of this, selling would require them to pay capital gains tax on the increased value of the property.
Estate planning issues can be complicated regardless where you live. You will want to create a will or trust before you die to ensure you provide appropriately for the needs of your husband or wife.
When making a gift under community property law, both spouses must be in agreement.
For this reason, it is wise to get written consent from your spouse for any gift you wish to make.
If your spouse did not give permission, he or she can revoke the gift at a future time.
Irrevocable life insurance trusts can also become quite complicated when it comes to community property laws.
Let us say you want to create one of these trust to benefit your spouse with a $10 million policy.
Before you do anything you should know no gifts or premium payments can come from a community property account.
A portion of the trust will become part of the estate of your spouse. This would subject it to estate taxes and defeat the purpose of the trust.
To help solve this issue, you should sign a "transmutation" agreement, making contributions to the trust entirely from you or your spouse.
If community property is advantageous to your marital situation and you move a non-community property state, you may be able to keep some of these benefits.
In whatever state you choose to settle, working with an experienced estate planning attorney will help you realize your goals.
So, how do you find an "experienced" estate planning attorney?
First, ask around. Friends, family and other professional advisors are trustworthy sources.
Second, conduct an "organic" search on "Google" for "estate planning" near you (e.g., "Estate Planning Anytown MoKan").
Third, either way, verify! Check out the education, experience, ratings and client reviews of any attorney before you contact him or her.
In fact, I use both of these services to thoroughly vett attorneys before referring members of our "client" family for legal help in other areas of law or for matters in jurisdictions outside Kansas or Missouri.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: Barron’s (June 28, 2016) “How Community Property States Are Different”