Community Property Planning Techniques - Part I

Executive Summary

In our highly mobile society, it is likely that many legal practitioners and other professional advisors from common law states will encounter clients who have moved from a community property state.  Although only nine states adhere to a community property law regime, such states account for approximately one-third of the population of the United States.  It is also highly likely that the attributes of community property will follow the assets these clients bring with them.  The purpose of this article is to discuss the unique challenges presented to professionals in a common law state when confronted with a married client who has migrated into that state from a community property or marital property state.

Many professionals from common law states do not realize that a married couple moving to their state from a community property state will bring community property with them.  This community property carries special attributes with respect to ownership, management and control rights, and income tax treatment.  Professionals from non-community property states must understand these attributes in order to provide proper advice to their clients.
There are considerable advantages with respect to community property.  These benefits include a double basis step up at the first spouse's death, estate equalizations, minority discounts for each spouse's 50% interest in closely held business and real estate interests, utilization of both spouse's applicable exclusion amounts and general fairness.  Professionals from non-community property states need to appreciate these advantages and take appropriate steps to preserve imported community property.

Fortunately, with proper planning, the preservation of community property is relatively simple.  The article describes in detail the preferred method for maintaining imported community property:  the joint community property trust.  The article also provides an example of such a trust.

Finally, the article discusses the unique ethical issues relating to the ownership and maintenance of community property.

The article includes a review of the fundamental principals of community property law, discusses the effect that migration into a common law state will have on community property interests, considers in detail the considerable income tax, estate tax and other advantages of retaining the community property character of migrant clients' assets and examines various techniques for retaining that character and for planning for clients with community property.

I. Introduction

A. In our highly mobile society, it is likely that professionals from common law states will encounter clients who have moved from a community property state, and it is also highly likely that the attributes of community property will follow the assets these clients bring with them.  The purpose of this article is to discuss the unique challenges presented to professionals who reside in non-community property states and who are involved in wealth management, particularly when forced with a married client who has migrated into that state from a community property or marital property state.  Although community and marital property have some distinctions, those are technical in nature and not relevant to the issues considered in this outline.  Accordingly, this article will be discussing the relevant concepts as though community property and marital property are synonymous and will be using those terms interchangeably throughout the article.

B. This article will review in basic terms the fundamental principles of community and marital property law, discuss the effect that migration into common law states will have on community property interests, cite the considerable income tax, estate tax, and other advantages of retaining the community property character of migrant clients' assets, and examine techniques for retaining that character and planning for the client with community property.  However, this presentation is hardly comprehensive.  This article will only scratch the surface of the issues raised.  The detailed knowledge and sophisticated planning techniques that result in the best estate plans for clients with community property require years of study and practice.  It is recommended that the planner in a common law state with migrant clients from a community property state consult with an experienced practitioner from that state for assistance.

C. It was from Spain and France that the community property systems became established in the United States, and it has at one time or another existed in all of the southern tier states, as well as Iowa, Arkansas, Missouri, and Utah.  Lobinger, The Marital Community: Its Origins and Diffusion.  14 A.B.A.J. 211 (1928).  During the 1940's the states of Michigan, Nebraska, Oklahoma, Oregon, Pennsylvania, and Hawaii adopted community property statues to take advantage of federal tax laws.  These statues were subsequently repealed or declared unconstitutional following congressional enactment of tax legislation in 1948.  However, the fact remains that for a period of time community property was created in these states and the community character of the property continues to exist.  Note, Community Property in a Common Law Jurisdiction: A Seriously Neglected Area of Law, 16 Washburn L.J. 77, 78-79.