What Is Community Property and Does It Matter for Estate Planning?

When it comes to marriage and finances, not all states treat assets equally. In the nine community property states across the United States, assets acquired during a marriage are considered jointly owned, regardless of who earns the income or whose name is on the account. This legal framework can dramatically influence how estates are divided, taxed and passed down after death.

Understanding whether your state follows community property laws—and how these laws apply to your estate—is critical for ensuring that your plans are properly structured. Even if you don’t live in a community property state, you may still be affected if you or your spouse once lived in one or acquired property there.

What Is Community Property?

In community property states, all income and assets acquired by either spouse during the marriage are presumed to be owned equally. This includes salaries, investment returns, retirement contributions and real estate purchases.

By contrast, property that was owned by one spouse before the marriage or received by gift or inheritance is generally considered separate property—unless it is commingled with joint funds or retitled.

The nine community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska allows couples to opt into community property rules by agreement.

Why It Matters in Estate Planning

Community property laws affect how assets are distributed after death. In many cases, a surviving spouse automatically retains their half of the community property and may inherit some or all the deceased spouse’s share, depending on the estate plan.

This impacts wills, trusts and beneficiary designations. If a spouse tries to leave more than their half of the community property to heirs in a will, disputes or even legal challenges may occur.

Community property also provides a tax benefit in some cases. When one spouse dies, the entire value of the community property, including the surviving spouse’s half, receives a step-up in basis to the fair market value at the date of death. This can significantly reduce capital gains taxes if the property is sold in the future.

The Risks of Overlooking Community Property

Estate plans that don’t take community property rules into account can create confusion and unintended consequences. For example:

• A will that divides all assets equally among children could unintentionally disinherit the surviving spouse from their rightful share.
• Titling jointly acquired assets solely in one spouse’s name could create future legal disputes.
• In blended families, failing to distinguish between separate and community property may lead to disputes between a surviving spouse and stepchildren.

Even if you don’t currently live in a community property state, owning property there, such as a vacation home or rental property, can bring these rules into play.

Planning for Community Property

An estate planning attorney can help identify which of your assets are community or separate property and create documents that reflect your goals. This may involve:

• Creating separate or joint trusts to manage different types of property
• Using premarital or postmarital agreements to clarify ownership
• Coordinating beneficiary designations to ensure that they align with legal ownership
• Planning for state-specific laws if you move or own property across multiple states

Proper planning prevents family conflicts, protects surviving spouses and ensures that tax benefits are maximized.

Key Takeaways

• Community property affects ownership and inheritance: In certain states, all marital assets are jointly owned and must be divided accordingly.
• Tax benefits may apply: Community property often receives a full step-up in basis, reducing capital gains taxes for heirs.
• Uncoordinated plans cause problems: Wills, trusts and titles must align with state laws to avoid unintended results.
• Separate property needs protection: Property acquired before marriage or by gift must be handled carefully to avoid commingling.
• Work with a knowledgeable attorney: Legal guidance helps identify community property, prevent disputes and optimize your estate plan.

Legacy One Law Firm, APLC is an estate planning and probate administration law firm in Los Angeles, California, serving families throughout the State. Schedule a quick and easy consultation with our estate planning attorney, Sedric E. Collins, Esq., or call 323-900-5450.

References: Justia (August 2024) “Community Property vs. Equitable Distribution in Property Division Law” and Forbes (Apr 30, 2023) “Community Property Estate Planning: Not So Simple”