What is Community Property?

Community property essentially means that all assets and debt acquired during a marriage, even if acquired by one spouse, are considered marital property, and owned equally between spouses. However, there are some exceptions, property owned by one spouse before marriage or received as a gift, by will, or inherited by one spouse, after marriage, will be considered separate property. It is important to note that the state laws can vary and change depending on IRS rulings, court decisions, etc.

Currently, Minnesota does not recognize community property, but the following 9 states do: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Something that may not always come to mind when you are relocating is how it will affect each spouse’s ownership in their assets if moving from a community property state to a common law state, or vice versa. Sadly, this may be something that isn’t recognized until one spouse passes away and the other realizes ownership in their assets wasn’t what they intended. Fortunately, even with a move, there are steps that may be able to be taken to retain the community property character of the asset(s) if that is what is desired. If the decedent previously lived in a community property state, then this is something that should be examined.

A potential tax advantage of living in a community property state and owning community property is that when a first spouse dies, only one-half of the property value is included in their estate, (whether or not an estate tax return is required) but the full value of any asset will get a step-up in basis. In a common-law state, like Minnesota, that step-up would only pertain to the portion the decedent owned. The additional increase in basis may be beneficial to reduce future taxable gains upon selling a home, securities, or other assets.

Community property states also recognize premarital and postnuptial agreements. There may be situations or certain assets that spouses would like to own as community property or as separate property and this type of agreement may help achieve the desired classification.

With many factors to consider related to community property it can be overwhelming and confusing. Contact Boulay’s Estate and Trust planning team and we would be happy to assist you and your family with any questions you may have.