1. History and Policy: Community property law developed from Germanic tribal practices introduced in Spain following the fall of the Roman Empire. In the United States, the Spanish system was retained in territories acquired from Spain, Mexico, and France. On admission to statehood, several southwestern states adopted community property statutory provisions. Other states, having no substantial contact with Spanish culture or institutions, nevertheless adopted the community property system to attract women as settlers and provide for women’s property rights, because community property is a commitment to the equality of spouses. It treats marriage as a partnership in which spouses devote their particular talents, energies, and resources to their common good, and acquisitions and gains that are directly or indirectly attributable to partners’ expenditures of labor and resources are shared equally.
2. Geography: In the following eight states, the community property system is mandatory for residents unless they enter into an agreement opting out of the system.
Arizona Idaho New Mexico Texas
California Louisiana Nevada Washington
Although a number of community property rules are applicable among the community property jurisdictions, considerable local variations exist. Note also that Wisconsin is a default community property regime, though couples may “opt-out”; and Alaska permits couples to “opt-in” to a community property regime.
3. Community property vs. separate property vs. quasi-community property: Community property is all property acquired by either spouse during marriage while domiciled in a community property state, excluding property received by gift or inheritance. Community property provides each spouse a one-half, undivided, legal or equitable, vested or contingent, present or future interest in the property. Separate property refers to property acquired before marriage or property acquired after marriage by gift, bequest, devise or inheritance. Quasi-community property treats acquisitions of property made outside the state that would have been community property had they been acquired in-state as community property. Quasi-community property laws were designed to protect a nonmonied spouse following a move from a common law state to a community property law state.
4. Characterizing Community Property: Title is generally irrelevant to the characterization of property in community property states. Rather, the presumption is that a married couple owns all the property that they acquire during marriage as community property. This presumption can be rebutted only by strong proof to the contrary, referred to as “tracing.” Unless separate property can be traced, commingling community and separate property generally results in all commingled property being considered as community property.
5. Step-Up (or Down) in Basis: Under federal income tax law, all community property receives a new basis at the death of the first spouse to die equal to the property’s then fair market value, even though only the decedent’s one-half community property interest is included in his gross estate. The basis adjustment for the survivor’s interest in community property is a unique advantage that has no counterpart in common-law states.
6. Tangible Property vs. Real Estate: The character of tangible property is fixed at the time of acquisition in accordance with the law of the marital domicile, whereas the character of real property is generally determined by the law of the real property’s situs. For example, real property located in a community property state owned by spouses who reside in a common law state is generally considered community property.
7. Estate and Gift Tax: Community property automatically equalizes estates between spouses. Because each spouse owns one-half of the property, each spouse can dispose of only one-half of the couple’s community property at death. When the first spouse dies, his or her gross estate includes one-half of each and every item of the couple’s community property. Community property allows both spouses to take full advantage of their estate, gift and GST exemptions without re-titling assets.
8. Conflict of Laws, Federal Preemption and International Jurisdictions: Generally, the law of the matrimonial domicile governs in ascertaining the rights which each party acquires in the property of the other, except when federal laws preempt state laws. For instance, ERISA preempts application of a state’s community property laws to an ERISA-governed pension plan. Also beware that property located in foreign countries following a community property regime generally retains its community property nature even after the couple moves to a common law country or state.
9. Planning for Clients Moving from a Community Property State to Massachusetts: When spouses relocate from a community property jurisdiction to a common law property jurisdiction, the couple’s rights and interests in property that can be moved will be governed according to the law of the spouses’ marital domicile at the time of acquisition. It is advisable to: (1) determine community property assets with a written inventory; (2) ascertain whether clients have a community property agreement that characterizes assets as separate; (3) protect the double basis step-up; and (4) develop a plan to preserve community property (or re-characterize it as separate property).
10. Planning for Clients Moving from Massachusetts to a Community Property State: Most pre-existing assets will be viewed as quasi-community property, while assets that begin to accumulate from spouses’ personal efforts after the move are automatically community property. Remember that commingling separate and community property taints the character of separate property because the presumption is that all property is community property. To avoid this issue, consider transmutation. Transmutation is an interspousal agreement that alters the character of the property through a written statement that the ownership of the property is altered. Before the move, it is advisable to: (1) ask for an inventory of all property at the time of relocation (which thereby provides an itemized list of all of the spouses’ separate property); (2) advise spouses to maintain separate checking and savings accounts to avoid and/or trace any commingling; (3) suggest that clients develop a practice of maintaining basic records noting the source of funds to pay for major investments; and (4) determine whether the spouses wish to enter into a post-marital agreement. Pre- and post-marital agreements provide clarity and limit disputes when the rights of the spouses change after changing domicile from a common law state to a community property law state during marriage. Pre-marital agreements entered into by spouses residing in a common law property jurisdiction are cause for concern if they do not take into account a future move to a community property jurisdiction. Spouses moving to a community property jurisdiction who are interested in preserving the separate nature of property are advised to enter into a post-marital agreement fixing the character of that property.