Trust Law/Level III · Family trusts/3.3 Couples and blended families/Lesson 7

Community-property states

How your state’s marriage laws change what assets belong to you, and how that affects tax breaks at death.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

Keep community property documented as such: at the first death both halves get a new basis (IRC §1014(b)(6)), often wiping out capital gains. Catch: at least half the community interest must be in the decedent’s gross estate, and basis can step down.
In California, community property passes to the surviving spouse by a spousal property petition (form DE-221) instead of probate, or with no court at all if titled with right of survivorship (Civil Code §682.1). Catch: the petition still needs proof of character.
Couples elsewhere can opt in through Alaska, Tennessee, South Dakota, Kentucky or Florida community property trusts; Tennessee, Kentucky and Florida accept non-residents with an in-state trustee. Catch: the double step-up is unsettled, given Commissioner v. Harmon (1944).
Moving from a community-property state? California treats property acquired elsewhere as quasi-community property (Family Code §125), and about 16 states adopted the 1971 Uniform Disposition of Community Property Rights at Death Act. Catch: mixed accounts without records are hard to characterise.

MaterialsA list of all property titles currently held in one or both spouses’ namesThe specific community property statute page for your state (e.g., California Family Code §760)A copy of any existing trust documents to check the ‘characterization’ clause

Wonder

If we buy a house with my separate funds, does it become community property?
What happens if I put our community assets into a revocable trust before one of us dies?
Why do some couples in states like Florida use an opt-in community property trust?

Explore

In nine US states, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, property acquired during marriage is presumed to be community property. It belongs equally to both spouses, generally even if only one spouse’s name is on the title, although title and records can affect the presumption. Property owned before marriage or received by gift or inheritance is usually separate property. In California, Family Code §760 sets the basic rule, and on divorce the community estate is divided equally unless the spouses agree otherwise. Each state’s code sets its own details.
Five other states let couples opt into community property: Alaska (1998), by a community property agreement or trust; Tennessee (2010); South Dakota (2016); Kentucky (2020); and Florida (2021), through a community property trust. Tennessee, Kentucky and Florida allow couples who live elsewhere to use their trusts if at least one trustee is a resident or a trust company of that state. Puerto Rico, a US territory, also has community property. In opt-in states nothing changes unless the couple signs the required document; otherwise the ordinary separate-property rules apply.
The main federal tax effect comes at death. Under Internal Revenue Code §1014(b)(6), when one spouse dies, the surviving spouse’s half of community property also takes a new basis equal to its value at death, provided at least half of the community interest was included in the deceased spouse’s gross estate. With the deceased spouse’s half, that is often called a ‘double step-up’. For jointly owned property in other states, usually only the deceased spouse’s half is adjusted. Basis can go down as well as up, and the rule matters most for assets that have risen in value.
Characterising property correctly matters when funding a trust. Transferring separate or community property into a revocable trust generally does not change its character, and many trust documents record which assets are community and which are separate. Both spouses usually sign when community property is transferred. Opt-in states set strict requirements: Kentucky and Florida, for example, require the trust to declare expressly that it is a community property trust under the state’s act, to be signed by both spouses, and to have at least one qualified trustee. A mistake can change ownership or tax results.
The federal tax effect of opt-in community property is not settled. In Commissioner v. Harmon (1944), the US Supreme Court refused to recognise Oklahoma’s elective community property for federal income tax, and the IRS Internal Revenue Manual says that reasoning should also apply to elective systems such as Alaska’s, South Dakota’s and Tennessee’s for income reporting. Neither the IRS nor a court has clearly ruled on whether these trusts get the §1014(b)(6) double step-up. IRS Publication 555 says it does not cover the Alaska, Tennessee and South Dakota elections.
Moving between states can matter. California treats property acquired elsewhere that would have been community property if acquired in California as ‘quasi-community property’ (Family Code §125). A couple who moves away from a community-property state may keep community rights in property already acquired; about 16 states have adopted the Uniform Disposition of Community Property Rights at Death Act (1971) for such property. A joint bank account or other mixed property without clear records may be hard to characterise later. Rules vary widely by state.

Key facts

The nine US community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Alaska (1998), Tennessee (2010), South Dakota (2016), Kentucky (2020) and Florida (2021) let couples opt into community property, by agreement or through a community property trust.
Under Internal Revenue Code §1014(b)(6), the surviving spouse’s half of community property also takes a new basis at the first spouse’s death, if at least half of the community interest was in the deceased spouse’s gross estate.
Whether opt-in community property trusts receive the §1014(b)(6) double step-up has not been settled by the IRS or the courts; Commissioner v. Harmon (1944) refused to recognise elective community property for income tax.
California treats property acquired elsewhere that would have been community property if acquired in California as quasi-community property (Family Code §125).
Florida’s Community Property Trust Act applies to trusts created on or after 1 July 2021 and can be used by couples who live outside Florida if a Florida qualified trustee serves.

Exercise nine, six, three, one

9CollectList up to 9 major assets (most families have fewer), such as a home, brokerage accounts or a business interest, noting for each how it is titled and when and how it was acquired.

6ClusterSort the assets into 6 categories: separate property, community property, assets in an opt-in community property trust, joint tenancy with right of survivorship, tenancy in common, and assets whose character is unclear.

3DistillReduce the 6 categories to 3 groups: assets whose character is clear and documented, assets whose character is unclear, and assets whose tax result at death depends on unsettled law.

1CrystallizeWrite 1 sentence naming which of your assets has the least clear character, and what record would settle it.

Fact check

Dates, figures and claims checked against the published sources listed below.

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