At this year’s Annual National Academy of Elder Law Attorneys (NAELA) Conference, held this past May in Boston, two legal experts held a session focused on deciphering what even they admit can sometimes be the bewildering language of community property.
Letha McDowell, managing member and attorney at McDowell Law Group, and Vanessa Kanaga, CEO of InterActive Legal, talked attendees through the basics of community property, including how to converse effectively with a community property lawyer.
When it comes to community property, Kanaga said, attorneys end up “speaking different languages, to some extent.”
The following nine states, plus Puerto Rico, comprise community property states: Arizona, California, Indiana, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Sometimes, Alaska counts as a community property state as well, as it has an opt-in community property jurisdiction. All other states are noncommunity property, or “common law,” jurisdictions.
“If we’re in a common law jurisdiction and we’re talking to people from community property jurisdictions, we’re talking about the same concepts,” she said. Yet, she adds, “we may even be using the same terms, but we mean slightly different things.”
It’s a confusing concept that can easily confound attorneys and clients alike. After all, Kanaga acknowledged, “just because your clients have community property doesn’t mean they know what it is.”
Community Property vs. Separate Property in a Community Property Jurisdiction
In a community property state, there are two main categories of property: separate property and community property. For a married couple in these jurisdictions, “everything is presumed to be community property unless it’s established that it’s separate property,” Kanaga explained.
Separate Property
Separate property in a community property jurisdiction is property that was brought into the marriage – for example, one spouse may have owned property prior to the marriage or received property through an inheritance or gift. “It doesn’t mean it’s going to stay separate property,” Kanaga pointed out.
Community Property
With community property, each spouse owns an undivided 50 percent interest in the property.
Kanaga provided an example to illustrate: A married couple has $100,000 in a bank account. One of them wants to take out $50,000 and give it away. However, they own an undivided interest in this property. This means that, “if one spouse gives away $50,000, they have made a gift of $25,000 of their property and $25,000 of their spouse’s property. They still each own $25,000 in the account.”
As management rights over property can vary by jurisdiction, this is something attorneys need to be aware of, Kanaga said.
Community Property Rights
In common law states, a married couple typically owns personal property jointly with rights of survivorship. In contrast, community property is not jointly owned property with rights of survivorship.
“In fact, in community property states, there is no concept of joint with rights of survivorship or tenancy by the entirety because it’s not needed. It doesn’t apply to community property,” Kanaga said. “So, if something is owned as community property and the first spouse dies, it doesn’t mean that the survivor is going to inherit the property. They may – but it doesn’t automatically happen.”
Cross-Border Issues
Property status can also shift if clients move from one type of jurisdiction to another. This is why McDowell and Kanaga advise attorneys to have some level of understanding around these concepts, as these situations are, they said, are far more common than people may realize.
Cross-border clients can include those who move from a community property state to a common law state, or vice versa. It may also include clients who purchase property in a different jurisdiction – or any combination of these.
For the purposes of the presentation, McDowell and Kanaga focused their discussion on the first scenario: moving from a community property state to a common law one. Yet even then the answer is not always clear-cut.
Generally, community property acquired in a community property jurisdiction will retain that status in a cross-border move. However, McDowell and Kanaga still cautioned that because state laws vary, it’s always best to work with local counsel.
McDowell told session participants that she has come to appreciate the positive aspects of community property. “Community property isn’t bad, folks. I didn’t know this,” she said. “It can be good.”
For one, community property can get a double step-up in basis. Kanaga returned to the idea of undivided 50 percent interest to illustrate this. If one spouse dies, it is only their 50 percent interest that is included in their estate for tax purposes. “However,” she said, “the entire property gets the step-up in basis at the death of the first spouse. That’s a huge benefit.”
Estate equalization and certain tax advantages are also potential benefits with community property. “That’s huge, McDowell said, “if you are a separate property attorney and you’ve never thought about community property before or why we actually care about it.”
Regardless of the specific situation, co-counseling with an attorney from another jurisdiction may be appropriate and advantageous when serving cross-border clients. Clients, however, may not want to retain another attorney, thinking it just sounds too expensive.
In this case, McDowell advised, clarity is key; put everything in writing. In your letters, she told attendees, include language that clearly states to the client the recommendations you have made to counsel with an attorney in another state. This way, if they do not take this extra step, you will be identifying to the clients that you cannot make guarantees without them “dotting all the i’s and crossing all the t’s.”
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