Community Property from State to State

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June 10, 2019

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11:20 a.m. – 12:20 p.m.

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Connecticut Convention Center

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Hartford, CT

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CT Bar Institute Inc.

CT: 1.0 CLE Credits (General)

NY: 1.0 CLE Credits (AOP)

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Seminar Materials Sponsored by

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No representation or warranty is made as to the accuracy of these materials. Readers should check primary sources where appropriate and use the traditional legal

research techniques to make sure that the information has not been affected or changed by recent developments.

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Page 1 of 35

Lawyers’ Principles of Professionalism

As a lawyer I must strive to make our system of justice work fairly and

efficiently. In order to carry out that responsibility, not only will I comply

with the letter and spirit of the disciplinary standards applicable to all

lawyers, but I will also conduct myself in accordance with the following

Principles of Professionalism when dealing with my client, opposing

parties, their counsel, the courts and the general public.

Civility and courtesy are the hallmarks of professionalism and should not

be equated with weakness;

I will endeavor to be courteous and civil, both in oral and in written

communications;

I will not knowingly make statements of fact or of law that are untrue;

I will agree to reasonable requests for extensions of time or for waiver of

procedural formalities when the legitimate interests of my client will not be

adversely affected;

I will refrain from causing unreasonable delays;

I will endeavor to consult with opposing counsel before scheduling

depositions and meetings and before rescheduling hearings, and I will

cooperate with opposing counsel when scheduling changes are requested;

When scheduled hearings or depositions have to be canceled, I will notify

opposing counsel, and if appropriate, the court (or other tribunal) as early

as possible;

Before dates for hearings or trials are set, or if that is not feasible,

immediately after such dates have been set, I will attempt to verify the

availability of key participants and witnesses so that I can promptly notify

the court (or other tribunal) and opposing counsel of any likely problem in

that regard;

I will refrain from utilizing litigation or any other course of conduct to

harass the opposing party;

I will refrain from engaging in excessive and abusive discovery, and I will

comply with all reasonable discovery requests;

In depositions and other proceedings, and in negotiations, I will conduct

myself with dignity, avoid making groundless objections and refrain from

engaging I acts of rudeness or disrespect;

I will not serve motions and pleadings on the other party or counsel at such

time or in such manner as will unfairly limit the other party’s opportunity

to respond;

In business transactions I will not quarrel over matters of form or style, but

will concentrate on matters of substance and content;

I will be a vigorous and zealous advocate on behalf of my client, while

recognizing, as an officer of the court, that excessive zeal may be

detrimental to my client’s interests as well as to the proper functioning of

our system of justice;

While I must consider my client’s decision concerning the objectives of the

representation, I nevertheless will counsel my client that a willingness to

initiate or engage in settlement discussions is consistent with zealous and

effective representation;

Where consistent with my client's interests, I will communicate with

opposing counsel in an effort to avoid litigation and to resolve litigation

that has actually commenced;

I will withdraw voluntarily claims or defense when it becomes apparent

that they do not have merit or are superfluous;

I will not file frivolous motions;

I will make every effort to agree with other counsel, as early as possible, on

a voluntary exchange of information and on a plan for discovery;

I will attempt to resolve, by agreement, my objections to matters contained

in my opponent's pleadings and discovery requests;

In civil matters, I will stipulate to facts as to which there is no genuine

dispute;

I will endeavor to be punctual in attending court hearings, conferences,

meetings and depositions;

I will at all times be candid with the court and its personnel;

I will remember that, in addition to commitment to my client's cause, my

responsibilities as a lawyer include a devotion to the public good;

I will endeavor to keep myself current in the areas in which I practice and

when necessary, will associate with, or refer my client to, counsel

knowledgeable in another field of practice;

I will be mindful of the fact that, as a member of a self-regulating

profession, it is incumbent on me to report violations by fellow lawyers as

required by the Rules of Professional Conduct;

I will be mindful of the need to protect the image of the legal profession in

the eyes of the public and will be so guided when considering methods and

content of advertising;

I will be mindful that the law is a learned profession and that among its

desirable goals are devotion to public service, improvement of

administration of justice, and the contribution of uncompensated time and

civic influence on behalf of those persons who cannot afford adequate legal

assistance;

I will endeavor to ensure that all persons, regardless of race, age, gender,

disability, national origin, religion, sexual orientation, color, or creed

receive fair and equal treatment under the law, and will always conduct

myself in such a way as to promote equality and justice for all.

It is understood that nothing in these Principles shall be deemed to

supersede, supplement or in any way amend the Rules of Professional

Conduct, alter existing standards of conduct against which lawyer conduct

might be judged or become a basis for the imposition of civil liability of

any kind.

--Adopted by the Connecticut Bar Association House of Delegates on June

6, 1994

Page 2 of 35

Faculty Biography

Abby Wool Landon is an Estate Planning lawyer from Portland, Oregon, where she serves as

the Chair of the Estate Planning Practice Group at Tonkon Torp LLP. In her practice, Abby

creates estate plans that include wills, trusts, asset protection devices, and family business

succession planning. She also assists clients in navigating probate and trust administration, and

provides expert support for contested probate and other fiduciary disputes. She has significant

experience in: corporate tax law and tax partnerships, multiple-generation trust and estate

planning, tax domicile analysis (including international applications and planning for non-citizen

residents), charitable planning, marital trust planning for step-families, and premarital and post-

marital agreements.

In addition to her estate planning background, Abby has 27 years’ experience in business law,

helping individual and corporate clients with tax, complex business transactions, mergers and

acquisitions, corporate management, business succession, and wealth management. As a small

business owner, director, and member of several family partnerships, Abby brings hands-on

experience to her clients.

A popular speaker, Abby has presented at CLE seminars throughout the Pacific Northwest,

speaking on asset protection, managing community property from state to state, elder financial

abuse, and estate planning for families in conflict. She is involved in community education and

teaching to private groups in order to raise awareness of the importance of wills and trusts,

corporate formalities, tax, and gift and estate tax planning to maximize profit and avoid conflict.

Page 3 of 35

CommunityPropertyfromStatetoState

(CLC2019‐B04)

Session B

10:50 – 11:50 a.m.

Speaker: Abby Wool Landon, Tonkon Torp LLP, Portland, OR

Agenda

Common Law vs. Community Property Law

Separate vs. Community Property

Titling of Property

Real Property

Debts and Liabilities

Quasi-Community Property

The Uniform Disposition of Community Property Rights at Death

Benefits of Community Property

Page 4 of 35

FROM STATE TO STATE

COMMUNITY PROPERTY IN

TRANSIT

Presented by

Abby Wool Landon

S l i d e s p r e p a r e d w i t h S arah Einowski

Page 5 of 35

ABOUT TONKON TORP LLP

Tonkon Torp was founded in 1974 as a nine lawyer firm by Moe Tonkon, Morris Galen,

and Fred Torp. Today Tonkon Torp is one of the largest firms headquartered in Oregon,

with over 80 lawyers dedicated to a sophisticated business practice throughout the

United States. Though the firm's size and practices have grown over the past 40 years,

our core values of excellent legal work, leadership, client service, and community

involvement remain unchanged. We pride ourselves on our responsiveness and the

personal quality of our services, and we consider the goodwill of our clients and our

professional reputation to be our most valuable assets. Although we provide a full

spectrum of business law and litigation services, we believe our focus on efficiency and

results is what sets us apart from other law firms. Clients view Tonkon Torp as a trusted

adviser because our relationships are rooted in a thorough understanding of their

business and industries and a shared vision of their goals.

Page 6 of 35

ABBY WOOL LANDON

Abby joined Tonkon Torp in 2017 as Chair of the Estate

Planning Practice Group, and a partner in the Business

Department and Tax Practice Group. She creates estate plans

that include wills, trusts, asset protection devices, and family

business succession planning. Abby also assists clients in

navigating probate and trust administration and provides expert

support for contested probate and other fiduciary disputes. She

has significant experience in corporate tax law and tax

partnerships, multiple-generation trust and estate planning, tax

domicile analysis (including international applications and

planning for non-citizen residents), charitable planning, and

marital trust planning for step-families.

http://tonkon.com/attorneys/abby-wool-landon

Page 7 of 35

COMMON LAW VS. COMMUNITY

PROPERTY LAW

The United States has two property systems: common law and community property law.

In a common law state, an individual whether married or single, is a separate individual

•

with separate legal rights to property and separate tax obligations. Common law states

are also called “separate property” states.

In a community property state, the law treats a married couple much like business •

partners, participants own an undivided one-half interest in the “community.”

Internationally:

Many non-English speaking European countries have systems similar to community

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property, the majority deriving from a Spanish law. Other non-English speaking

countries have community property aspects of their marital law, China for example.

English speaking countries, such as the UK and Canada, are separate property •

countries.

Beware, your international clients may have signed an agreement binding them to the

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laws of the jurisdiction in which they married.

Page 8 of 35

COMMUNITY PROPERTY STATES

There are nine community property states: Arizona, California,

Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and

Wisconsin. Alaska is an opt-in community property state that

gives both parties the option to make their property community

property.

Two states, Alaska and Tennessee allow non-residents to

establish a community property trust with a trustee in their state.

Page 9 of 35

COMMUNITY PROPERTY – MORE ABOUT

ORIGINS

Community property law in the United States is primarily of Spanish origin, although there

remains some French influence in Louisiana. Legal historians believe that community property

law developed from Germanic tribal practices introduced in Spain following the fall of the

Roman Empire. Early emigrants to the Spanish possessions in the New World carried with

them elements of the Spanish legal system into the southwest. Other states, even though they

had no substantial contact with Spanish culture, still adopted the community property system,

and were perhaps motivated by their desire to attract women as settlers.

(Source: Portfolio 802-2nd: Community Property: General Considerations, Detailed Analysis, A. Origins of Community Property.)

Under original application, the community was a partnership where almost all control fell to the

husband but women were allowed property ownership.

(Source: https://www.library.hbs.edu/hc/wes/collections/women_law/)

The “partnership” created by current community property laws strives for gender equality but

vestiges of the past still exist. In the relatively progressive state of Washington, the statutes

have clear broad restrictions against one spouse controlling both shares of the community

property, but if only one spouse participates in the “management [related to such property] the

participating spouse or participating domestic partner may, in the ordinary course of such

business, acquire, purchase, sell, convey or encumber the assets, including real estate, or the

good will of the business without the consent of the nonparticipating spouse.” RCW

26.16.030(6); see also RCW 26.16.030(1)-(5).

Page 10 of 35

COMMUNITY PROPERTY – WHY DO WE

CARE?

Community property is the subject of distinct and different income and

transfer tax (estate and gift) treatment. The applications of each have

profound consequences for our clients during their lifetimes and after death.

Once property is characterized as community property, unless the property

owner intentionally changes its character or unintentionally commingles it

with separate property with such impunity that it cannot be traced, it retains

its character as community property for all tax purposes and for many legal

purposes. Legal applications include treatment on divorce or separation,

transfers on death, and obligations for debts and liabilities. Choice of law

decisions and conflict of law applications abound for the unwary practitioner.

Page 11 of 35

DOCTRINE OF INCEPTION OF TITLE

The separate or community character of property is determined at the time the property is

acquired. The name “Doctrine of Inception of Title” is misleading. Although there is a lot of law

related to titling with respect to community property, this threshold doctrine is the common law

application of characterization across the community property states.

Basic characterization: Property acquired before marriage is the acquiring spouse's separate

property. Property acquired during marriage is presumed to be community property unless it is

affirmatively shown that the property was acquired: (1) by gift, devise, or descent; or (2) with

the separate property or separate credit of one of the spouses.

See, e.g., In re Borghi, 167 Wash.2d 480 (2009), holding that the original characterization of

real property as separate at the time of acquisition was not overridden where both spouses’

names were on the deed. In Borghi, wife purchased real property in her name alone with her

separate property. Later she titled the property to her and her husband. At the appeals

court level in Washington, courts were finding in favor of a presumption that simply titling

property to husband and wife was intended to create community property. The Washington

Supreme Court upheld the general rule, that re-titling the property was not sufficient to show

intent to change the character of the property as wife’s separate property.

Page 12 of 35

COMMUNITY PROPERTY

DEFINITIONS

Community property is defined with a few variations in the community

property states.

A typical definition (after taking into account changes in the law recognizing

same sex marriage*) provides that “property acquired after marriage by either

spouse or both together” is presumed to be community property.

Some community property states include in the statutory definition that

acquisition is by a married couple domiciled

in that state when the property

was acquired. (Washington, California, and Alaska)

Some only define community property as not being separate property. They

imply that property is not community if the married couple acquiring the

property are domiciled in a separate property state when the property was

acquired. See, e.g., A.R.S. § 25-211 (Arizona); N.M.S.A. § 40-3-8 (New

Mexico).

*The Supreme Court held in Obergefell v. Hodges, 135 S. Ct. 2584 (2015), that states must license and recognize same-sex marriages,

such state laws using the terms “husband” and “wife” to define marriage should be unconstitutional.

Page 13 of 35

CHARACTER OF PROPERTY

Once property is characterized at inception, on application as a general rule, the

character of movable property, which would include intangible personal property, is

fixed at the time of acquisition in accordance with the law of the marital domicile.

The character of real property on application is generally determined by the law of the

place where the land is situated. Reconciling this concept with the “Inception

Doctrine” can be confusing. If either spouse owns separate personal property in a

common law jurisdiction, that property maintains its character as separate property

when brought into a community property state, and any realty purchased with that

separate property will maintain its separate character. See Brookman v. Durkee, 46

Wash. 578, 90 P. 914 (1907). A couple can take an affirmative step or steps set forth

in the law of the community property state to obtain community property treatment.

If community funds are used to purchase real property in a common law state,

community property jurisdictions will recognize the community nature of the real

estate, even if the common law property state will not.

(Source: Portfolio 802-2nd: Community Property: General Considerations, Detailed Analysis, L. Choice of Law Problems.)

Page 14 of 35

SEPARATE VS. COMMUNITY

PROPERTY

Presumptions play a significant role in determining the character of property as separate

or community. The character of property becomes fixed at acquisition and can only be

changed by an intentional act. The presumption that property is community once

established can only be overcome by the evidence standards held by a state, in some it is

a “preponderance of the evidence,” others like Washington apply a “clear and convincing”

evidence standard.

As a general principal of law, a “presumption” is defined as a legal inference or

assumption based on the known or proven existence of some other fact or group of facts.

It is a rule of evidence, and shifts the burden of production or persuasion to the opposing

party. Property acquired by a married couple in a community property state will carry a

presumption, generally that the character of the property is community. The burden to

prove otherwise is on the party opposing that characteristic. The presumptions govern on

applications.

(Source: Bryan A. Garner & Henry Campbell Black, Blacks Law Dictionary (2016). )

Page 15 of 35

COMMUNITY VS. SEPARATE PROPERTY,

THE IMPORTANCE OF TRACING

Property that can be traced to community property maintains its

characteristic as community, even if it is combined with separate

property or has had its form converted many times. Separate

funds that become so commingled with community funds that it is

impossible to trace them are generally deemed to be community

funds. There is a large body of state and federal tax law applying

tracing to disposition of assets.

Example, if community funds are used to improve a separate

property asset, the asset will typically stay separate, but spouse

will be entitled to one-half reimbursement of community funds

invested in separate property. See, e.g., Potthoff v. Potthoff, 128

Ariz. 557, 562 (Az. App. 1981).

Page 16 of 35

TITLING OF PROPERTY

In common law states like Connecticut, property titled to one spouse or another is •

presumptively that person’s separate property. See General Statutes § 46b-36; see

also Cherniack v. Home Nat. Bank & Trust Co. of Meriden, 151 Conn. 367, 370,

198 A.2d 58 (1964); Porter v. Thrane, 98 Conn. App. 336, 908 A.2d 1137 (2006).

a community property state, titling is not determinative of ownership. See Cal. •

Fam. Code § 760 (“[A]ll property, real or personal, wherever situated, acquired by a married

person during the marriage while domiciled in this state is community property.”).; N.M.S.A.

§ 40-3-8 (“Except as provided in Subsection C of this section, "community

property" means property acquired by either or both spouses during marriage

which is not separate property”); RCW 26.16.030(B) (“[Property acquired] by either

husband or wife or both, is community property.”).

Watch for survivorship provisions. In some states, community property can also have •

rights of survivorship and in some states they cannot. The applications are varied and

complex.

Page 17 of 35

REAL PROPERTY: LAW OF SITUS

CONTROLS

Idaho: Where community real property, which was subject to contract

to convey, was located in Idaho, law of Idaho was controlling, not the

law of Oregon where contract to convey was executed, and, under

Idaho law, it was necessary that a contract selling the community

property was signed and acknowledged by both spouses. Fuchs v.

Lloyd, 80 Idaho 114, 326 P.2d (1958); I.C. § 32-912.

Texas: The court divided property acquired in Texas by a Colorado

resident couple after death as a tenancy in common, applying its

finding that Colorado is a common law and not a community property

state, and as such has no concept of property acquired by both parties

“belonging to the community.” McCarver v. Trumble, 660 SW.2d 598

(Tex.App.Ct. 1983).

Page 18 of 35

REAL PROPERTY CONT’D

Arizona: The character of property acquired during marriage is

determined by the law of matrimonial domicile at the time of acquisition

of the property. Jones v. Weaver, 123 F.2d 403 (9

Cir. 1941); Potthoff

v. Potthoff, 128 Ariz. 557, 627 P.2d 708 (App. Div. 1 1981).

Louisiana: Community property applies to spouses domiciled

Louisiana, regardless of their domicile at the time of marriage or place

of celebration of the marriage. LA C.C. Art. 2334. But if only one

spouse moves to Louisiana and is domiciled there, a community

property regime is not established. Hand v. Hand, 812 So.2d 625 (La.

2002).

Page 19 of 35

CHARACTERIZING CHANGES IN VALUE

VS. INCOME FROM SEPARATE

PROPERTY

Changes in value and natural enhancement of property do not change

its characteristic as separate or community.

Income from separate property may be considered the spouse’s

separate property in some community property states including

Washington and California, but in Texas, Idaho, Louisiana, and

Wisconsin income from a spouse’s separate property is a community

asset.

Page 20 of 35

DEBTS AND LIABILITIES

In Connecticut (and many other common law states including Oregon),

with some exceptions, a debt acquired by a married person is that

person’s separate debt. Utzler v. Braca, 115 Conn.App. 261 (2009).

In a community property state, a debt acquired during the marriage by

either party to the marriage is a debt against the community. Creditor

rules vary among the community property states. Generally though, for

debts incurred either before or during the marriage, creditors of either

spouse may be able to reach the community property assets, and a

spouse’s separate property may not be reached by creditors of the

other spouse.

Example, Washington Domiciled Spouse 1 owns Oregon real property.

Washington Spouse 2 commits a heinous tortious crime. The creditors

of Spouse 2 can look to the Oregon real property to satisfy the debts of

Spouse 2.

Page 21 of 35

QUASI-COMMUNITY PROPERTY

Quasi-community property laws have evolved in some community

property states to treat separate property acquired outside the state

subject later to the jurisdiction of the community property state as if it

were community property for specific purposes.

Arizona: Quasi-community property treatment on divorce, but not

•

death. Ariz. Rev. Stat. Ann. § 25-318(A).

California: Quasi-community property laws apply on both death and

•

divorce. Cal Probate Code § 100-105; Cal. Fam. Code § 125.

Idaho: Quasi-community property laws apply on death, but not

•

divorce. I.C. §§ 15-2-201 to 205.

New Mexico: Quasi-community property treatment on death and

•

divorce. N.M.S.A. §40-3-8(C); N.M. Stat. Ann. §40-3-8(D);

Washington: Quasi-community property treatment only on death

. •

RCW § 26.16.220 – §26.16.250.

Page 22 of 35

QUASI-COMMUNITY PROPERTY CONT’D

In Arizona, Nevada, and Texas there is no law

requiring a deceased spouse’s separate property to

be shared with a surviving spouse.

The danger? Spouse 1 owns substantially all the

assets of a married couple acquired in Connecticut.

The couple moves to Arizona. They do not execute

any community property agreement affirmatively

creating community property. When Spouse 1 dies,

Spouse 2 may be left with no share of Spouse 1’s

property and no right comparable to the elective share

laws that governed in the original state of domicile.

Page 23 of 35

T H E U N I F O R M D I S P O S I T I O N O F C O M M U N I T Y

P R O P E R T Y R I G H T S A T D E A T H

17 common law states have adopted the Uniform Disposition of Community Property

Rights at Death Act (the “Act”).

(Source: https://www.uniformlaws.org/committees/community-

home?CommunityKey=cc060023-d743-4d32-b7e5-35b12cba4fb8.)

Oregon was the first state to adopt it. Connecticut adopted it in 1985. C.G.S.A. § 45a-

458 through 466.

The Act preserves each spouse’s rights in property that was community property

before the move to a non-community property state, unless the married couple

severed or altered their community property rights. C.G.S.A. § 45a-459.

The Act covers “all or the proportionate part of that [real or personal] property

acquired with the rents, issues, or income of, or the proceeds from, or in exchange

for, [property acquired as or which became, and remained] community property under

the laws of another jurisdiction, or traceable to that community property.” Id.

Page 24 of 35

MORE ABOUT THE UNIFORM DISPOSITION

OF COMMUNITY PROPERTY RIGHTS AT

DEATH

The Act contains two rebuttable presumptions for determining whether property falls under

its ambit.

The Act is presumed to apply to any property acquired during a marriage while living in a •

community property jurisdiction.

The Act is presumed to not apply to any real property located in Connecticut and personal •

property wherever situated if such property was acquired during the marriage in a non-

community property jurisdiction and title was taken in a form that created rights of

survivorship. Therefore, if a married couple moves to Connecticut and uses the proceeds

from the sale of community property to purchase property here as joint owners with

survivorship rights (as S1 & S2 or “by entireties”) without more, the couple is presumed to

have acquired the property as non-community property. C.G.S.A. § 45a-459.

Page 25 of 35

BENEFITS OF COMMUNITY

PROPERTY

There are a number of wealth management benefits to owning community property:

Each spouse is deemed to be an undivided one-half owner of community property. On the first death, with nothing •

more, in many community property states a deceased spouse can pass their one-half interest to someone who is

not their spouse. The alternative is true, a member of the community cannot alienate a spouse’s share in the

community. There is no forced elective share or right to a percentage of the marital property because each

spouse is deemed to own one-half of all community property.

Tax benefits include full basis adjustment under IRC 1014(b)(6), the tax basis of all community property adjusts •

on the death of the first spouse. The surviving spouse receives a basis adjustment in both the decedent’s one-half

interest in community property as well as the surviving spouse’s one-half interest.

Income Tax is Different: On the first death, each spouse is immediately a separate taxpayer, whether the •

surviving spouse files a joint tax return or each of the estate and the spouse file separately for the year of death.

Whichever is decided, half the community income earned between the date of death and closing of administration

is reportable by the estate and half by the surviving spouse. As a result, the possibility of shifting income among

taxpayers with different tax brackets creates complexities not found in the final income tax return for a married

couple in a common law state.

Page 26 of 35

INCO M E A N D T R A N S F E R TA X ( E S T A T E + G I FT)

TREA T M E N T S T A T E P R OPER T Y L A W V S .

FEDE R A L T A X L A W

In Internal Revenue Manual (IRM) 25, Chapter 18, Section 1, the IRS addresses the nexus

between state property law and federal tax law this way:

Federal law determines how property is taxed, but state law determines whether, and to

•

what extent, a taxpayer has “property” or “rights to property” subject to taxation. Aquilino v.

United States, 363 U.S. 509 (1960); Morgan v. Commissioner, 309 U.S. 78 (1940).

Accordingly, federal tax is assessed and collected based upon a taxpayer's state created

rights and interest in property.

This interplay of federal and state law requires an understanding of relevant state property

•

laws to properly analyze community property issues. Community and common law creates

different rights and interests in property. There is a difference in the way that federal tax is

assessed and collected under each system. Further, the appropriate method of analysis to

employ is also different under each system. There are a vast number of cases where state

and federal tax law interact, some dispositive on the state law application and others on the

tax law application.

Page 27 of 35

ADVISING CLIENTS

If you are practicing in a separate property state, like Oregon and

all of the New England states including Connecticut, once a

practitioner determines if marital property would be characterized

as one of community or separate, or is determined to be a

combination of each, then our goal in assisting our clients in

managing and maintaining their assets is to advise them with

respect to their rights and duties.

Page 28 of 35

PLANNING WITH AND FOR COMMUNITY

PROPERTY

A careful estate planning practitioner helps their client identify and trace community

property. CPA’s and wealth managers can help you by identifying community

property (and recommending the client consult with competent legal counsel to

confirm) and assisting the client in recognizing the significance of its separate

management to retain its identity. You and your client should consider:

Methods for separating community property: a separate revocable community

•

property trust or a separate class of assets for community property in their

revocable trust.

Planning for the unique control provisions on the first death using a trust or trusts.

•

For clients with asset protection goals, consider the additional creditor exposure in •

managing the assets. In that subset, if the client wants to maintain the tax benefits

of community property, consider an asset protection trust plan. Example:

Spouses

live in Washington; S1 buys house in Connecticut with community property funds,

puts house in S1’s name alone. Under Connecticut Debtor/Creditor law, can S2’s

creditors get at house in S1’s name?

Page 29 of 35

SPOUSES: MIGRATION, EXAMPLE 1

Example

Ben and Ron life in California (community property) and want to get married.

They execute a premarital agreement that keeps Ben’s San Francisco rental

as his separate property, but define the income from that property as

community property. Ben and Ron get married, then move to Connecticut

(separate property).

San Francisco rental is still Ben’s separate property. But now that Ben and

Ron live in a separate property state, is the income from the rental community

property?

Recommendation: Use one or more revocable trusts to preserve community

property and mimic community property desire in separate property state

Page 30 of 35

SPOUSES: MIGRATION, EXAMPLE 2

Example

William’s family is from Avon, own a summer house in Hilton Head, South Carolina. His parents intend for William to

inherit and manage their interest in commercial real property.

William and Cate marry in Connecticut. William’s Parents die leaving Connecticut commercial real property to

William.

William and Cate later move to California. The commercial real property is inherited property, so characterized as his

separate property. But what about the distributed income from the property?

In California—Remains William’s separate property. Cal. Fam. Code § 770. (Same for Arizona, New

Mexico, Washington, and Wisconsin.)

In Texas—Different result. Unless the spouses have agreed otherwise, all income acquired during

marriage, whether from separate or community property, is community property. Yaklin v. Clusing, Sharpe

& Krueger, 875 S.W.2

380 Tex.App. 1994). (Same for Idaho and Louisiana.)

Remember: A Premarital Agreement can address these issues. When drafting Premarital Agreement consider

provisions for both principal and income to create flexibility in case couple moves to community property state.

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THINKING ABOUT RETIREMENT PLANS

As a general rule, if a married couple contributes to a retirement plan while domiciled in a community

property state, the plan account is community.

The Retirement Equity Act of 1984 (“REA”) covers most qualified retirement plans but not IRA’s, Roth

IRA’s and some 403(b) plans. All other retirement plans are either required to fully comply with REA or

partially comply with REA. With respect to covered plans, the Supreme Court has held that REA

preempts state spousal rights laws such as community property. Boggs v. Boggs, 570 U.S. 833. Under

REA, benefits distributed by the plan to a married employee must be distributed in the form of a

“qualified joint and survivorship annuity” or provide that the participants non-forfeitable accrued benefit

is payable in full upon the participants death to the participants surviving spouse. A spouse can waive

these rights in writing after care is taken to understand the restrictions on such a waiver. A spouse can

consent to having their beneficial interested directed to a trust. Natalie Choate, Life and Death Planning

for Retirement Benefits, 3.4 (7

edition). In Oregon, we are accustomed to thinking that a spouse has a

separate property interest in their retirement plan. In a community property state, a married couple may

assume that for all purposes, their retirement is community. It can come as a surprise to learn that the

right of the non-participant spouse is so limited some characterize qualified plans as not being

community property at all. This may be an overstatement because in divorce these rights can be

affected by a qualified domestic relations order (QDRO) properly prepared in accordance with the plan

provisions and federal law.

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CONUNDRUM: QUALIFIED

RETIREMENT PLAN

S1 and S2, long term marriage, adult joint children, all property community property and they

are residents of a community property state.

Their primary asset is a 401(k) pension and profit sharing plan with S1’s employer valued at

over $4M. Other assets valued at approximately $2M.

Both parties want to benefit their children equally on the second death and want to protect their

assets from “creditors and predators” by way of a trust on the first death.

If S2 were the first to die, the couple could plan for her to leave up to $1M in trust for her

husband’s benefit, with the residue to their joint children. If S2 agrees to their plan, then the

entire $2M could be in trust. In the meantime, what about S1’s $4M qualified plan proceeds?

It could wind up in the hands of S1’s next spouse or a creditor and not in the hands of S1 and

S2’s joint children. In the alternative, if S1 was the first to die, he can name S2 or with the right

provisions a trust for her benefit. In short, in a community property state, couples think they

control all the assets as if in a partnership. They may decide together to disproportionally

contribute to one or the other’s qualified plan. However, if the primary asset is a qualified plan,

the spouse participant has the greater estate planning control.

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THINKING ABOUT INSURANCE

POLICIES

Community property states take three different approaches to insurance:

“Inception of title” (also known as “inception of right”) whereby if the contract of insurance was 1.

purchased before marriage, even when payments towards the policy ownership are made after

marriage, it remains separate property. See T.C.A., Family Code § 3.006 (Texas); Barnett v.

Barnett, 67 S.W.3d 107 (Tex. 2001).

Pro rata approach, where the investment portion of a whole life policy is prorated between separate 2.

ownership before marriage and payments made from community property after marriage. See Cal.

Family Code § 2640; McBride v. McBride, 11 Cal.App.2d 521 (2d Dist. 1936).

In Washington, for a whole life

or cash value policy, if the ownership is mixed, reported cases have 3.

applied a pro-rata division to the death benefit itself. Wilson v. Wilson, 35 Wn. 2d 364 (1949).

For a term policy there are more general rules

. Term expires and is renewed with each payment, it 4.

is generally classified as community or separate depending on the character of the funds used to

make the last payment

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Thank you!

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