Migrating Clients from Common Law to Community Property States (and Vice-Versa)
“Migrating Clients from Common Law States to Community Property States and Vice-Versa,” that’s the subject of today’s ACTEC Trust and Estate Talk.
This is Natalie Perry, ACTEC Fellow from Chicago. Clients often move or change their marital status. ACTEC Fellow Al Golden from Austin, Texas reviews what to keep in mind as clients move between community property and common law states. Welcome, Al.
Thank you, Natalie. Let’s start out with the theory behind community property, which is that it’s a community of efforts so that husband and wife share equally and simplistically in half of the assets acquired after marriage except by gift, devise or descent. One of the things you need to keep in mind, however, about community property jurisdictions is that they do not have the same laws and it’s not monolithic.
Community Property Traits
The presumption of community property among the community property states is relatively uniform, but there are differences. Texas, for instance, requires clear and convincing evidence for anybody trying to assert that property acquired after marriage is separate property. Perhaps the most important differences come in the income from separate property.
The majority rule is that income from separate property is separate, but a minority of states – Texas, Louisiana, and Idaho – treat income from separate property as community property, which creates real issues in tracing and comingling the assets and one must be really careful in preserving the community character in those three states.
Management rights differ. The Texas system allows spouses who have property in their own name – or more correctly property that would have been separate if it had been acquired outside of marriage – is sole management community and the party who owns the sole management community can manage, control, and dispose of that sole management community. California, on the other hand, requires joint management of community property. The easiest way to track community property is to fund a joint revocable management trust. In common law jurisdictions, each spouse has their own trust.
In community property jurisdictions, the spouses are likely to have a joint trust, and planning for a move by a common law lawyer can create real problems. And so, the first step is for the common law lawyer to consult with counsel in the jurisdiction from which the client moved or to which the client is moving before the move if preservation of the character is of importance. And a question that’s been ignored – and I have never seen any writing or speaking about this – is there’s a lot of migration between community property states.
After all, community property states represent 20 percent of the population of this country and there is a lot of migration, for instance, from California to Texas – two states with very differing rules. The creditor laws of the new domicile will govern even if the assets are in a revocable management trust and planning for a move by a common law lawyer can create real problems, as I mentioned earlier.
Commonly Overlooked Community Property
There are also assets that can easily be overlooked. For instance, IRAs are community property. So, a will from one spouse to children of a prior marriage that says, “I leave all my interest in community property to my children by a prior marriage” inadvertently conveys the participant’s or the owner’s one-half interest in their retirement benefit, their IRA. And so, you need to be cognizant that those kinds of assets need special attention. Fortunately, qualified retirement plans are not the same. And, under federal law, federal law preempts state law so that qualified retirement plans are not community property. In the case of Boggs v. Boggs, the Supreme Court determined that preemption.
Determining how the community portion of proceeds of a life insurance policy, not payable to the surviving spouse, is to be treated is also a different problem. And another thing to consider in moving to a community property state from a common law state is quasi-community property, which is an equitable doctrine used to prevent the separate property character from inuring to the benefit of the owner of the separate property.
California, Wisconsin, and Louisiana recognize quasi-community property both on divorce and death. That means that they treat property that was separate when it was acquired as if it were community property for purposes of death or divorce. Texas, Arizona, and New Mexico recognize quasi-community property only at divorce. And we have just scratched the surface of the difficulties and complexities of clients who cross jurisdictional lines between separate property states and community property states and even between community property states.
Thank you, Al, for educating us on migrating clients and the issues with moving from community property states to common law states. We appreciate it.
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