We attended selected sessions of Stetson Law's 2020 National Conference on Special Needs Planning and Special Needs Trusts, which took place virtually via Zoom October 9-16. We will be reporting on those sessions over the next couple of weeks.
California attorney Stuart D. Zimring and Florida attorney Bruce Stone explained the differences between community property and separate property states and how the distinctions affect special needs planning at a session of the 22nd Annual Stetson National Conference.
The current community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, along with Puerto Rico. In addition, some non-community property states permit the creation of community property for certain residents for tax purposes. Zimring grew up in and practices elder law and special needs law in California, so community property is what he understands. He considers community property a different “philosophical system” of holding property compared to the separate property system.
What exactly is community property? Community property is property acquired by a husband and wife during marriage. It is not property that one spouse brings to the marriage, inherits, or is gifted. But just because property is held in only one spouse’s name, Zimring notes, doesn’t necessarily mean it isn’t community property. For example, the paycheck that a spouse brings home every week is community property even though only one spouse’s name is on the check. If that check is used to acquire property, then that asset is community property, regardless of whose name is on the account or the asset.
Zimring considers the community property system to be a more equitable system than the separate property system. In community property states, “marriage is an economic entity” and each spouse “contributes to the economic success of the entity.” Each spouse owns an equal undivided one-half interest in each community asset. Zimring argues that in a separate property system, a spouse has rights to property on a spouse’s death or in the case of the dissolution of the marriage, but the couple does not have an equal economic partnership.
That said, community property laws differ from state to state. Depending on the state, partners can vary their property interests via prenuptial agreement, post-nuptial agreement, exceptions in the law, and transmutation (taking community property and turning it into separate property or vice versa). In California, for example, a couple can enter into a pre- or post-nuptial agreement that alters whether or not there is any community property. These agreements must be in writing and there should be significant safeguards built in to make the agreements enforceable. In Texas, however, transmutation isn’t possible because community property is built into the state’s constitution.
Zimring said transmutation has benefits and risks. In second marriages or when one spouse is bringing significant separate property into the marriage, transmutation may be appropriate. For example: if one spouse owns a business at the time of the marriage that he or she receives significant income from, the parties may decide that it is appropriate that the asset remain that spouse’s separate property and the income from that property will remain that spouse’s separate property.
When doing estate planning in a community property state, Zimring said that attorneys must look closely at the property. Just because the couple has separate bank accounts doesn’t automatically mean they have separate property, so the attorney must dig a little deeper.
Public benefit planning
Zimring then discussed how benefit planning works in a community property state. He noted that the Medicaid agency is going to look at the entire net worth of the family unit -- both community and separate assets. Zimring focuses on taking steps to minimize the damage to a surviving spouse when one spouse passes away and the Community Spouse Resource Allowance is no longer applicable. Because community property only exists in the marital relationship, at the death of one of the spouses the deceased spouse’s share of the community property will go wherever the spouse directed it to go. If the deceased spouse leaves everything to the surviving spouse, then the surviving spouse will be disqualified from public benefits. Under federal law, if the deceased spouse wants to leave property in a special needs trust, the spouse has to do it through a testamentary trust. In order to protect the surviving spouse’s public benefits, attorneys need to create a testamentary trust for the benefit of the surviving spouse and have the deceased spouse’s share of the estate flow into that trust.
Zimring explained that California estate planning attorneys primarily use living trusts because the probate process is time consuming. Zimring creates an estate plan in a revocable living trust, and then creates a testamentary trust that is embedded in the wills of the spouses. The living trust provides that on the death of the first spouse to die, his or her share of the estate is gifted to the trustee of the testamentary special needs trust contained in the will. The court has to create the testamentary special needs trust, so attorneys do need to probate the deceased spouse’s will. Once the trust is created, the living trust’s trustee can put the assets in the special needs trust. This has the effect of shielding half of the estate. Whatever spend down is necessary will involve only the surviving spouse’s half of the estate. In some states you cannot have a “dry trust,” so you would need to have a corpus in the trust for it to be valid.
Divorce
When marriage ends, the community property will become separate property, but it doesn’t necessarily happen at the same time. A marriage can be dissolved, with a plan to divide assets later or there can be a legal separation, which terminates the community property, but not the marriage. Zimring notes that Medi-Cal (California’s version of Medicaid) does not consider legal separation to be a divorce.
Zimring also explained the importance of educating family courts on the possibility of paying a child support or spousal support order directly into a special needs trust. If you are dealing with a child who needs Supplemental Security Income (SSI), then you want to make sure a special needs trust is part of the support order. And if you have a current support order that is not putting funds in an SNT, you can modify the support order.
Personal injury and malpractice
In California, a personal injury settlement is considered community property. If the injured person wants to place those proceeds into a special needs trust, the property is still community property. Zimring stressed that the trustee of the SNT must make sure that if a married person is putting money into the trust, he or she must consult with an attorney to transmute that property into separate property.
Common law states
Attorney Bruce Stone practices law in Florida, which follows the common law, but he explained that community property issues can come up in non-community law states.
When it comes to divorce, separate property states mimic the community property system, Stone said. Divorce law is based on the same concepts as community property, but separate title rules govern life and upon death.
Stone provided an example of how community property rules can complicate things in a common law state. The case Quintana v. Ordono (195 So. 2d 577 (1967)) involved a husband and wife who were married in Cuba, which is a community property jurisdiction. It was the husband’s second marriage, and he had no assets when he and his second wife married. In 1951 he moved to Florida for work, but he remained domiciled in Cuba and would go back there to visit. He earned almost all of his income and assets in Florida and bought stock in the Florida company that he worked for. In 1960, both spouses moved to Florida. He sold his stock and received a promissory note and contract in exchange. Eventually he died intestate in Florida. Under Florida’s intestacy law, his surviving spouse could get either one-quarter or one-third of his estate. In this case, the Florida widow argued she had a one-half community property interest in the Florida promissory note and the contract that he had received in exchange for his Florida stock. If she was right, she would get a half interest in those assets even though they were not in her name. The case made its way to the Florida appeals court, where the court ruled that because the couple was domiciled in Cuba when the stock was purchased, it was community property. Even though the husband transferred the stock after moving to Florida, it remained community property.
Based on the case, Stone offered the following observations for non-community property jurisdictions:
- Community property does exist in common law jurisdictions.
- The case involved personal property, but result would be the same if they had acquired real property.
- Personal property that is acquired by someone physically in a common law jurisdiction and with funds earned in a common law jurisdiction can be community property.
- Community property rights can exist in personal property that is acquired in a common law jurisdiction while the purchaser is domiciled in the common law jurisdiction.
For the line-up of conference sessions, click here. Conference recordings and materials will be available 7 to 14 days post-conference. For pricing and other details, contact elderlaw@law.stetson.edu
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