In most states of the United States, the property owned by spouses is considered their separate property: they can dispose of it at will or devise it in their will. However, some states treat marital property as being the community property of the marriage itself. Hence, all earnings, including any property acquired with those earnings, during the marriage constitute the community property of the couple and are owned equally by both spouses, regardless of how the property is titled or who earned the money to pay for the property.
Each spouse owns ½ of the money earned during marriage and of property acquired with such earnings. Separate property is property which each spouse had before the marriage, and any property received as a gift or inheritance.
If a spouse gives away community property without the consent of the other spouse, then the gift is voidable, but not void. The gift can only be voided by the non-donor spouse. If the spouses are still married, then the entire gifts can be returned to the community, but if the spouses are divorced or one has died, then only ½ of the gift can be voided.
Community Property States
- In 1998, Alaska enacted a statute permitting married couples to elect the community property option. Alaska Stat. §§34.77.010-34.77.995
- Alaska Community Property Trust - Alaska allows out-of-state residents to put property into a trust as community property. A couple can choose which property to put in the trust so that it is treated as community property, and, thus, receive the stepped-up tax basis when the 1st spouse dies. This can be beneficial for property that has appreciated considerably. Alaska Stat. §34.77.100
- New Mexico
- Wisconsin passed the Uniform Marital Property Act, which treats marital property as community property, but calls it marital property.
What Class: Community Property or Separate Property
Sometimes the distinction between community property and separate property is not clear, and it can differ from state to state.
Income from separate property is also separate property, except in Idaho, Louisiana, and Texas, where it is considered community property. Under the Model Marital Property Act, passed by Wisconsin, appreciation of separate property remains separate, but income earned during the marriage is community property.
When separate and community property funds are commingled, the courts have taken the position that where there is doubt, there is a presumption that the property is community property and not separate property. If spouses want to keep property and income separate, then detailed records should be kept to rebut the general state law presumption that commingled property is community property.
States differ in how to treat property acquired with both separate and community funds. For instance, if a spouse was paying for a life insurance policy before and after marriage, some states treat the life insurance policy as still being the separate property of the spouse, but that the premiums paid during marriage are paid back to the community with interest. In other states, the life insurance proceeds would be paid pro rata according to the proportions of the premiums paid before marriage to the premiums paid during marriage.
In Alaska, the community property option is available to those couples who choose it—in all other states, community property is defined by the law. However, couples in those states, and in Alaska if they have chosen the community property option, can decide by agreement which property is community property and which property is separate regardless of what it would be by operation of law.
Texas, Louisiana, and Idaho consider income earned from separate property to be community property. The other community property states generally consider such income to continue to be the separate property of the spouse who owns the income-producing property. If a married couple moves from a common-law state to a community property state, and they purchase property as co-owners, then a gift is presumed made from the spouse who earned the money or owned the previous property to the other spouse. Although no federal gift tax liability would be incurred because of the unlimited marital deduction, there may be a state gift tax.
Community Property Tax Advantages
Community property has a significant federal tax advantage over separate property. When one spouse dies, the community property receives a stepped-up basis, equal to the value of the property at the time of death. IRC §1014(b)(6) This lowers the capital gains tax that would be due when the property is sold, since the tax is only applied to the difference between its selling price and its stepped-up basis, which can result in significant tax savings for property that has appreciated significantly since it was bought.
However, separate property doesn't have the same advantage—only the decedent's separate property gets a stepped-up basis; not the separate property of the surviving spouse.
Community Property Management
Even though community property belongs to both spouses, most states allow 1 spouse to manage the property. However, the transfer of real estate requires the consent of both spouses. Even in separate property states, buyers of real estate would want the consent of both spouses, since all states give elective share rights to a surviving spouse, and some states may have a dower or curtesy law that gives the non-owning spouse an interest in the property that could potentially cloud the title.
A spouse may sell community property for value, because the value received becomes part of the community property. However, a spouse cannot give community property away without the other's consent, since there is no value given for a gift; hence, the community property would be diminished by the gift.
Testamentary Disposition of Community Property
Because each spouse owns ½ of the community property, each can dispose of their half of the community property, as well as their separate property, in their will. The surviving spouse has no elective share, or dower or curtesy, right to the property.
A common estate planning strategy is to give a surviving spouse the widow's election (this term is used even when the surviving spouse is a widower) between receiving a life estate of all the community property, or to elect against it, causing the deceased spouse's property to immediately go to the deceased spouse's beneficiaries. There are tax advantages and disadvantages to this strategy, but this strategy is often used so that the first-to-die spouse can give away some property that would otherwise go to the second-to-die spouse's descendants. In other words, the 1st spouse gives the 2nd spouse a life estate in exchange for more of the community property going to the 1st spouse's descendants after the 2nd spouse dies. This can make sense, for instance, if the 2nd spouse has no children but the 1st spouse has children from a previous marriage.
All community property states except Texas and Louisiana provide a community property with rights of survivorship option. When a couple elects this option, all the community property passes to the surviving spouse without going through probate. For instance, Wis. Stat. §766.60(5)(a) and Alaska Stat. §34.77.110(e) give the right of survivorship to community property designated as survivorship marital property or survival community property, respectively. A spouse may not dispose of survivorship marital property without the other's consent nor can the first-to-die spouse dispose of it in his will.
Moving Between Separate Property and Community Property States
When a couple moves from a separate property state to a community property state, or vice versa, there are specific rules that determine the characterization of the property and the rights of the surviving spouse. A few of these rules are well defined:
- real estate is controlled by the state laws in which it is located;
- whether personal property is separate or community property is determined by the domicile of the couple at the time of acquisition;
- the rights of the surviving spouse is determined by the surviving spouse's domicile at the time of death.
When a couple from a community property state moves to a separate property state, the community property retains its character, unless the couple agrees to classify it as separate property. The surviving spouse does not have an elective share right in the community property.
However, if community property is sold in a separate property state, then it becomes separate property unless the couple agrees otherwise. Note that changing community property to some other form of ownership, such as a joint tenancy eliminates the stepped-up basis tax advantage of community property when one of the spouses dies.
When a couple moves from a separate property state to a community property state, the separate property of the spouses remains separate property. To prevent a non-earning surviving spouse from potentially being deprived of all the marital property after the death of the 1st spouse, and without the elective-share law to compensate, most community property states allow a surviving spouse to claim ½ of quasi-community property, which is property that would have been community property if they had lived in the state during their marriage, but only if she survives the earning spouse; if she dies first, she cannot dispose of her half of the quasi-community property in her will—a significantly different result than if the property had been actual community property. Hence, quasi-community property is a form of spousal support.
Because separate property states have an elective share law, it would seem that a surviving spouse who moved from a community property state could claim ½ of the community property plus an elective share, which is usually ½ or 1/3 of the deceased spouse's estate. However, this result is prevented either because the community property is not subject to the elective share or because the surviving spouse's property is included in the augmented estate from which the elective share is determined; hence, the surviving spouse cannot increase her take by claiming both community property and an elective share.