One of the areas of focus of my professional practice has been to guide couples and their attorneys when a couple moves from Wisconsin to Minnesota. I have been licensed to practice law in Minnesota since 1982 and in Wisconsin since 1989.
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.