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Community Property FAQs
Why Is It Important For Couples To Understand What Community Property Is, And The Legalities Surrounding It?
If couples are knowledgeable about community property, then they can position themselves to take advantage of its various benefits and they can take steps to avoid losing those benefits if they decide to move to a state where there is no community property. Not only is knowledge about community property laws important to couples; but knowledge is also of significant importance to professionals, such as financial planners, insurance agents, lawyers and accountants, where the lack of competency could subject the professional adviser to a claim.
Generally, community property is defined as a type of ownership between a husband and wife in which each spouse owns an undivided one-half interest in each item of property acquired during the marriage, except property that is acquired by gift, devise, descent or personal injury. The title is not determinative: placing the property in the name of one spouse does not overcome the presumption that property acquired during the marriage is community property. Property acquired out of earnings during the marriage is presumed to be community property, as well.
For Wisconsin, community property is referred to as “marital property” and is codified in Wisconsin Statutes chapter 766. Effective January 1, 1986, Wisconsin became the 9th state to make community property the core law for property ownership and control in marriage. All nine states’ community property laws differ in some respects, but in all cases, the title no longer controls ownership.
On the other hand, in Wisconsin, a surviving spouse already owns one-half of marital property even if the marital property is held just in the name of the other spouse. Accordingly, surviving spouses in Wisconsin are not granted elective share rights, because again, the surviving spouse already owns half.
First, when a business owner moves to a community property state, such as Wisconsin, even if the shares of stock are titled in the name of that business owner, if income is reinvested into that business under circumstances where Wisconsin marital property law applies, then the business owner’s spouse will own one-half of the business owner’s shares. If then the business owner’s spouse dies and leaves his or her estate to his or her children of a prior marriage, the business owner will need to buy those shares back in order to keep those shares from passing to those children.
Another problem area arises when a couple moves to a community property state and fails to change the title of a highly appreciated asset from the former owner to a new account that can be classified as community property. In such a case, the missed opportunity of qualifying for the tax-advantaged double step-up in basis could be lost. Not only would the couple be disappointed, but if a professional planner missed this, that professional advisor could be sued.
As a voluntary service to my profession, I co-authored legislation to create a set of rules that apply when a couple with community property moves to Minnesota. That legislation is referred to as the Uniform Disposition of Community Property Rights at Death Act and is codified in Minn. Stat. Section 519A.11. This law became effective in 2013. It provides some helpful presumptions concerning community property brought into Minnesota. It gives Minnesota courts a set of standards to help those courts more uniformly determine whether community property rights have been preserve or lost.
So what is so important about preserving community property? Let me provide an example. Let’s assume that a couple moves to Minnesota from Wisconsin. While living in Wisconsin, one of them invested $50,000 of his or her earnings in a start-up company and as a consequence, that $50,000 has grown in value to $1,000,000 when the company went public. If the couple preserved the community property ownership properly, then upon the death of EITHER spouse, the shares get a step-up in income tax basis to the full current value of $1,000,000. That would allow the surviving spouse to sell those shares without having to pay any capital gains tax, and this would also allow the surviving spouse to reinvest 100% of the proceeds into a more diversified portfolio.
On the other hand, if the couple upon moving to Minnesota placed those shares into a jointly owned account with right of survivorship, that would destroy the community property nature of the shares. Then only one-half of the shares would receive a step-up in income tax basis. Capital gains tax would be taxable on the other half.