Issue 24.09
Community property is generally defined as all property acquired during marriage. In community property states such as California, Nevada, Arizona and Idaho, such property is considered to be owned equally by both spouses.
A community property agreement is an estate planning tool for those people who live in a community property state or who have acquired property in a community property state. Such an agreement is a special contract between husband and wife in which they specifically agree as to the ownership and disposition of their community and separate property. The requirements of a community property agreement are that it be made in writing and signed by the husband and wife, that it set out the rights of the spouses to the property, and that it be acknowledged in the same manner as a deed.
There are advantages to the use of community property agreements. There is simplicity of identification of all property as community property, eliminating complicated tracing of separate and community property. A spouse can maintain ownership of separate property in order to preserve the ability to make gifts without the consent of the other spouse. Also, sometimes a community property agreement is used by spouses to protect their separate property from the claims of the other spouse in the event of a divorce.
Residents of community property states have an advantage as far as the step-up in basis rules are concerned. If a married couple holds their assets as community property, upon the death of one of the spouses, the entire value of the community property asset will receive a step-up in tax basis, not just the interest owned by the deceased spouse. This results in a “double” step-up in tax basis benefit which is not available for assets held in other forms, such as joint tenancy.
A community property agreement does not bar creditors’ claims. In spite of its limitations, the community property agreement can be an ideal estate planning tool for many married couples and, together with carefully drafted wills or trusts, can be an important part of an estate plan. It is important to remember that a community property agreement does not eliminate the necessity of a will or a trust. It makes no provision for simultaneous death, for secondary beneficiaries, for specific bequests, or for naming guardians and trustees for minor children.
Jeffery J. McKenna is a local attorney serving clients in Utah, Nevada, and Arizona. He is a shareholder at the law firm of Barney & McKenna, with offices in St. George and Mesquite. He is the former President of the Southern Utah Estate Planning Council. He can be reached at 628-1711.