How Community Property Affects Your Estate Plan

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When it comes to estate planning, the type of property you own can significantly impact how your plan should be structured—especially if you’re married and live in a community property state. Learn how community property affects your estate plan.

What Is Community Property?

Community property is a form of marital ownership recognized in nine states:
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

property

Generally, any income or property acquired during a marriage—regardless of which spouse earned or received it—is considered jointly owned. For example, if a wife receives a paycheck and deposits it into her personal bank account, it’s still community property. Legally, both spouses own one-half, even if the account is in her name only.

Why It Matters for Estate Planning

This classification affects estate planning in both beneficial and complex ways.

1. Double Step-Up in Basis

One major tax advantage in community property states is the double step-up in basis.
Upon a person’s death, their share of an asset typically receives a “step-up” in cost basis to its fair market value at the date of death. In most states, only the deceased spouse’s half of jointly owned property gets this step-up.

But in community property states, the entire property—not just the deceased’s share—receives this step-up. That means fewer capital gains taxes if the surviving spouse sells the asset later. It’s a significant benefit and a potential reason to preserve community property status, even if you move to a non-community property state.

2. Gifting Can Get Complicated

When community property is involved, it’s easy to blur the lines between “mine,” “yours,” and “ours.”

For instance, if a wife funds a trust with her paycheck (remember, it’s actually 50% her husband’s property too) and names her husband as the trustee, that gift might unexpectedly be included in his taxable estate—simply because he has control over what’s partly his to begin with.

These situations can lead to unintended tax consequences if not carefully planned.

What You Should Do

If you live in or previously lived in a community property state, it’s important to:

  • Identify which assets are community vs. separate property
  • Understand how ownership affects taxation and inheritance
  • Avoid unintentionally severing community property status
  • Work with an estate planning attorney to navigate the nuances

Community property can be a powerful estate planning tool, but it requires precise handling to avoid pitfalls. With proper guidance, you can maximize tax benefits and keep your plan aligned with your goals.

From the desk of Attorney Brandon McGee

Brandon McGee
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