The fact that we share a common language and have constitutionally-protected rights to interstate trade and travel can sometimes make us forget that each state has its own laws, courts, and legislatures. In our very mobile society, this can create financial and estate planning challenges/opportunities that we may not be aware of. Most states, for example, are common-law states. When it comes to the ownership of assets, we generally presume that assets are owned just as they are titled. Nine states have community property laws. These are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. No, we did not forget our clients from Puerto Rico, where community-property laws also exist.* Generally, assets that are acquired during marriage in these states are considered community assets owned 50% by each spouse. Assets owned before marriage, by gift or inheritance, or through personal injury settlements, among other things, are considered separate property. However, assets earned before marriage, but that are comingled after marriage, can become community property.
Often, people work in community-property states for some period during their lives. Someone who lives for a time in California, for example, has likely earned funds that will continue to be community property even after he or she moves to a common-law state. Since community assets are taxed differently upon death than joint property in common-law states, we need to keep track of our community-property assets. In general, community assets and separate assets should not be commingled. This is just as important should we face divorce. The challenges are even greater because California, Idaho, Washington, and Wisconsin are quasi-community property states.
Let us consider the possibility of a fictitious Mary who owns a home in a common-law state where she lives with John. If they move to California and use the proceeds of Mary’s home to purchase a new home, the new home becomes community-property. If they moved to Texas, Mary would retain complete ownership of her home. What if Mary had inherited her home? In that case, Mary would retain ownership of her home since, had she inherited the home while living in California, it would have been separate property. Confused yet?
In our experience, very few people are aware of the intricacies of different forms of ownership and the variety of laws among states. Many people assume that most states operate in the same way. People often have outdated estate-planning documents that specifically state that they operate under the laws of a state in which they no longer reside. When we ask you questions about the ownership of your property, we are not being nosy. We are trying to uncover any potential benefits or problems while they can be taken advantage of or avoided.
Of course, we are not attorneys, we do not practice law, and the above examples are for illustration only. The laws governing ownership are far more complicated and require expertise. Our goal is to help you know where challenges/opportunities exist so that you can address them with the help of a competent attorney.
*https://www.irs.gov/publications/p555. Accessed on 02.05.2021.