· What states require community property?
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
· What is community property?
While the community property laws vary in each of the nine community property states, community property is generally defined as all property acquired by either spouse during marriage which is not considered separate property.
Separate property falls primarily into three categories:
1. Any property owned or claimed by a spouse prior to marriage
2. Any property acquired by a spouse during marriage by partition of community property, by gift, by inheritance, or by devise under a will or trust
3. Any property acquired from recoveries for personal injuries to a spouse’s body or reputation during marriage, excluding any recoveries for loss of earning capacity during marriage
All earnings from personal efforts and income from community property are community property. In some community property states, income from separate property remains separate property; in other community property states, income from separate property becomes community property unless the spouses have a written agreement that such income is to remain separate property.
Spouses who own community property are deemed to be partners, each owning an undivided one-half interest in the property. In that respect, community property is much like tenancy by the entirety.
· If I look at a deed or title to a car, can I tell if the property is community property?
Not always. Community property is ownership created by law. Who owns the actual title is irrelevant. It is how and when the property is acquired that determines if property is community or not.
· What is community presumption?
All property of a marriage is presumed to be community property. This presumption can be overcome if the spouse who is asserting that property is separate property does so with clear and convincing evidence of the separate nature of the property. This evidence is usually found by tracing the property to the time it was acquired, that is, to its inception of title.
Separate property acquired with separate property or with the proceeds from the sale of separate property will remain separate property as long as adequate records are kept to properly trace its inception of title.
· If my spouse and I have community property, what rights do we have in the property?
Community property is similar to property that is owned by tenants in common in common law property states. As with tenancy-in-common property, each spouse owns 50 percent of the property. This interest is called an undivided interest because neither spouse knows which 50 percent he or she owns. For example, if a horse is community property, one spouse doesn’t own the front part of the horse and the other the rear. Each simply owns 50 percent of the whole horse.
As a general rule, if one spouse wants to give away or sell his or her interest in community property, the other spouse must approve the sale or gift. Some community property states recognize the concept of special controlled community property, that is, community property titled in just one spouse’s name. Even though both spouses own the special controlled community property equally, the spouse whose name is titled on that particular property has sole management of and control over it. He or she may dispose of or transfer it without the agreement of the other spouse as long as doing so does not fraudulently affect the other spouse’s 50 percent ownership.
A spouse can, on death, leave his or her undivided interest in community property to others by will or trust. If a child inherits his or her father’s interest in community property, that child becomes a tenant in common with his or her mother.
· Are there any tax advantages to community property?
Yes, there is one very important income tax advantage that community property has over any other type of property. At the death of one of the spouses, community property receives a 100 percent step-up in basis. This means that if a married couple bought a vacation home for $100,000 and, at the death of one of the spouses, the house was worth $200,000, the surviving spouse could sell the house for $200,000 and there would be no capital gain tax.
Let’s contrast this to the situation in a common law property state.
If the home was owned in joint tenancy or tenancy in common, at the death of the spouse only one-half of the house would receive a step-up in basis. In this example, if the surviving spouse sold the house for $200,000, there would be a capital gain tax on $50,000. This is because the deceased spouse’s half of the house would get a new basis of $100,000, and the surviving spouse’s half would retain its cost basis of $50,000 (one-half its original cost).
· Since we are married and live in a community property state, the fact that we hold our property as joint tenants doesn’t defeat the presumption of community property for estate planning and income tax purposes, does it?
In some community property states it does. Unless provided otherwise by statute, joint tenancy and community property cannot exist at the same time on the same piece of property. This seemingly inconsistent result is a product of two conflicting types of law. Community property is a concept inherited from French and Spanish law. Joint tenancy is a concept inherited from English law. Like oil and water, they do not mix. Their legal incompatibility creates an anomaly in the law that can be rectified only by statute.
Without a law to the contrary, joint tenancy property that is owned by spouses in a community property state will lose the full step-up in basis allowed for community property. In addition, joint tenancy property passes to the surviving spouse by law; it is not subject to the control of the deceased spouse’s will or trust. Community property can be controlled by will or trust and is therefore much better for estate planning purposes.
· We have been married 54 years in a community property state and all our property is community property. Why do we need powers of attorney or a trust to handle our affairs if one of us becomes incapacitated? Can’t one spouse act for the other?
Not always. Although community property states allow either spouse, with one signature, to manage most property, this is not true for all property. Any sale or transfer of real estate or agreement to mortgage requires both signatures. Liquidating or borrowing from an employer-sponsored retirement plan [a qualified plan, such as a 401(k)] requires the consent of both spouses under federal law. If, for example, one of you becomes incapacitated and the other has to sell or borrow against real estate or tries to dip into a qualified pension plan to pay expenses, the healthy spouse will be forced to go to court for authority to sign for you if you do not have a trust or an appropriate power of attorney. In many cases, a court will stay involved to ensure the proceeds are handled properly.
What are the three ways to change the character of community and separate property?
COMMINGLING If separate property is commingled with community property to the extent that, even through tracing, clear and convincing evidence of its separate nature cannot be shown, the separate property will become community property.
PARTITIONING The laws of all the community property states allow spouses to enter into an agreement to divide (partition) their community property into separate property and to declare that certain property is separate property. The agreement must be signed and acknowledged before a notary public. It is now possible under the laws of most community property states for spouses and prospective spouses (through a prenuptial or postnuptial agreement) to agree not only to partition community property or declare the separate character of separate property presently in existence but also to partition or declare that certain property to be acquired in the future will be the separate property of a particular spouse. Thus, it is possible to agree that income from personal efforts, separate property, and property produced from separate property (such as offspring of livestock) is or will be separate property.
GIFTS If one spouse makes a gift of either separate or community property to the other spouse, this property, and all income or property produced from it, is presumed to be the separate property of the recipient spouse. Also, gifts made jointly to the spouses from a third party are deemed to be separate property held jointly, not community property.
· What is the character of property owned by a spouse who moves from a noncommunity state to a community property state? What is the character of property acquired in a community property state by a person in a noncommunity state?
If a spouse was domiciled in a common law state at the time he or she acquired property, the property is generally treated as his or her separate property and will remain separate regardless of whether he or she moves it to a community property state, as long as commingling does not occur. Further, if a spouse domiciled in a community property state acquires property outside the state, its character as to that spouse will be governed by the rules of the community property state. Thus, if the property is acquired with community property, it will be community property; if it is acquired with separate property or by gift, inheritance, or bequest, it will be the separate property of the acquiring spouse, as long as adequate records are kept to trace its inception of title and no commingling occurs. If a spouse who is domiciled in a common law property state acquires real estate in a community property state, the real estate will generally be deemed to be that spouse’s separate property since it was acquired with separate property.
· Can spouses own community property with right of survivorship?
The laws of most community property states allow spouses to own community property with right of survivorship. Spouses can agree be-tween themselves that all or part of the community property which they presently have or will acquire in the future will become the property of the surviving spouse on the death of a spouse.
Such agreements avoid probate at the first death of a spouse. However, it is strongly recommended that spouses not enter into joint community survivorship property agreements for several reasons. First, the same disadvantages that characterize joint tenancy also exist with joint community survivorship ownership. In addition, such an agreement may have to be adjudicated to the satisfaction of creditors or other third parties. That is, a court hearing may be required to obtain a court order stating that a particular agreement satisfies the statutory requirements for such agreements.
Even though the surviving spouse may prevail, either with or without the necessity of a court hearing, he or she would still be subject to all the severe shortcomings of joint tenancy. Joint community survivorship property can create more problems than it can solve. Stay away from such ownership.
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