Texans know this, but for those of you who are new to Texas, now that you are here you may find you will hear the term “community property” when you open accounts or purchase a home or other assets. If you come from the other 9 states that recognize community property it may not be as scary a term as it is to those couples who come from “common law property” states. The most common misconception is that as soon as a couple moves to a community property state everything they own is owned as “community property”. Alternatively, if you are a single person with some wealth and you get married and live in a community property state it is often thought that everything you had prior to your marriage immediately becomes community property after marriage. NOT TRUE – but it could be after several years by something we call “commingling”.
Community property typically means each party of the married couple owns one half of all the property of the couple, with full rights of ownership. In a community property state (or an opt-in community property state)[1], all property acquired during a marriage is usually community property, with the exception of property received as a gift or from an inheritance.
Community property states have a tax advantage for assets when one spouse dies. Under federal law, all community property (which includes both the deceased spouse’s one-half interest in the community property and the surviving spouse’s one-half interest in the community property) gets a new “stepped up” basis at the death of the first spouse equal to its fair market value (the “double step up”). The assets in an estate (or trust administration) that are deemed community property can be sold without recognizing a capital gain including the interest of the surviving spouse.
By contrast, in a common law state, for married couples who own assets together or individually, only the assets in the deceased spouse’s name or in the name of a revocable trust for his or her benefit are stepped-up. Assets owned jointly at death receive a step-up in basis on only half of the property. Assets in the surviving spouse’s name only are not stepped-up.
So what happens to the property of a married couple who moves to Texas from a common law state? We often refer to their jointly owned property (assuming the property was acquired during the marriage) as “quasi community property”. Fortunately, between the commingling and quasi community property rules, couples relocating to Texas from a common law state may be able to take advantage of the double step up if they should pass away in Texas.
Although the classification of property as community property provides advantages at death, many relocating couples are not happy with the division of their assets in the event of divorce. In order for a couple with separate assets who want to keep them separate in Texas, a couple would be well advised to seek advice from an estate planning attorney, who will also be able to advise the couple whether there are any other means of achieving their lifetime, post-mortem and other tax planning goals.
At Thrash, Carroll & Vanway Law Group we have been advising central Texas families with wealth and new, relocating couples for over 25 years. If you would like to learn more about your property and the planning opportunities take advantage of our complimentary initial consultation by calling 512.263.5400 or contacting [email protected].
[1] Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community property states. Alaska, Florida, Kentucky, Tennessee and South Dakota have “opt-in” provisions creating community property of certain assets