Estate planning is the process of determining how a person’s assets will be managed and distributed according to their instructions when they pass away or become incapacitated. However, estate planning can vary depending on whether you reside in a common law state or a community property state. In this blog post, we will focus on estate planning in community property states and explore the importance of Wills in this context.
Understanding Community Property States
In the United States, common law states follow a legal system that relies on judicial precedent and legal principles developed through court decisions. In contrast, community property states operate under a different framework where marital property is jointly owned by spouses. In common law states, property acquired by individuals is considered separate, even if they are married.
Community property is defined as all property that spouses own together. In community property states, the law basically says that everything the couple acquires during their marriage is co-owned by both of them, 50/50. The same is true of debt accumulated during the marriage.
Let’s consider an example of how a common law state differs from a community property state. Imagine that Amanda and Marty are married. The house and two cars are titled in Amanda’s name. She also has a significant amount of savings. Marty only owns one car, which is in his name only. If Amanda dies in a common law state, and writes a Will leaving her entire estate to PETA, then Marty could elect against the estate. This means he would be entitled to a share of the estate even though most of the assets were in his wife's name.
In a community property state, we start from a different assumption. In community property states, we assume that each spouse has a 50/50 stake in all of the assets and that any property Amanda acquired during the marriage belongs to both of them equally, even though they are only in Amana’s name.
Which States Follow Community Property Laws?
There are only nine community property law states in the U.S.: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska is an “opt-in” state, which means if you live in Alaska, you and your spouse can agree to abide by community property principles if you wish.
What Assets Are Community Property?
The following assets are considered community property:
Earned income: According to the IRS, “Earned income includes all the taxable income and wages you get from working for someone else, yourself or from a business or farm you own.”
Assets purchased with income: If one spouse uses income to purchase some other asset, like a house, then the house would be community property.
A home: A person’s residence is community property if purchased during the marriage. This is the case even if only one person’s name is on the title.
Rent: If you receive rent from a property that you purchased with community property income, then the money earned belongs to both of spouses in a community property state.
Debts: Any debts you acquire during a marriage are split equally, even if only one person in the marriage acquired the debt.
Damages and settlements: If either spouse won a settlement or damages in a lawsuit, then this money is usually community property.
How Community Property Affects a Will
If you reside in a community property state, you must leave 50% of your estate to your surviving spouse. As for the other half, you can give it to your spouse, or leave it to someone else if you choose. You’ll want to check the law in your state, because some states allow you to bypass probate if you elect to give the estate to your spouse by adding a “Right of Survivorship.”
Importance of Wills in Community Property States
Wills play a central role in estate planning in community property law states. They are legal documents that allow individuals to express their final wishes, designate beneficiaries, and appoint executors to manage their estates. Here are the key things to consider when writing a Will in a community property state:
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Asset Distribution: A Will outlines how your assets should be distributed after your passing. Without a Will, a state's intestacy laws will determine how your property is divided, which doesn’t always align with what your preferences were, if you had expressed them.
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Executor Appointment: In your Will, you will name an executor to oversee the administration of your estate. This person will be responsible for carrying out your instructions, managing your assets, paying debts and taxes, and distributing assets to beneficiaries.
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Guardianship Designations: For parents with minor children, a Will allows you to designate a guardian to care for your children if both parents pass away. This designation ensures your children will be in the care of someone you trust.
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Specific Bequests and Charitable Donations: A Will enables you to make specific bequests of certain assets or sentimental items to specific individuals. Additionally, you can include provisions for charitable donations to organizations or causes close to your heart.
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Blended Family Considerations: If you have a blended family with children from previous relationships, a Will allows you to make specific provisions to address their inheritance and ensure your assets are distributed according to your wishes.
Other Estate Planning Tools in Community Property Law States
While Wills are the most important estate planning tools, there are also other documents and legal vehicles that can complement your Will. These may include:
Trusts: Trusts provide flexibility and can help manage assets during your lifetime and after you die. They can offer benefits such as avoiding probate, providing for minor children, or protecting assets for beneficiaries with specific needs. They also maintain your privacy.
Power of Attorney: A power of attorney document designates someone to make financial and legal decisions on your behalf if you become incapacitated. This ensures that your affairs are managed according to your wishes.
Advance Healthcare Directives: These documents, including a living will and a healthcare power of attorney, outline your healthcare preferences and designate a trusted person to make medical decisions if you're unable to do so.
Estate planning in community property states requires careful consideration and the creation of a comprehensive Will. By drafting a Will, you can protect your assets, designate beneficiaries, and provide for your loved ones according to your wishes. Remember to review and update your estate plan periodically to account for any changes in your circumstances or preferences. You can use FastWill to make sure your plan is legally sound and aligned with your goals.
