In the presentations that I have made to members of the Minnesota Bar, I have referenced a number of “Watch Out for This” scenarios. I will describe two of them now.
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 ownership 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.