The remaining states are common law jurisdictions where the legal title to property indicates ownership. In these states, it does not matter whether the property in question is acquired before, during, or after a marriage. Barring unusual circumstances, the title controls ownership.
But what happens when a married couple moves from one type of jurisdiction to the other? Simply changing legal domicile does not change the ownership interests in the couple’s property. Thus, a couple domiciled in a common law state can own community property acquired previously, and vice-versa. In our current mobile society, this situation is quite common. It also provides potential estate planning opportunities because when one spouse dies, both spouse’s interests in property held under the community property laws of any state receive a full step-up in basis. I.R.C. § 1014(b)(6).
To help probate courts in common law states correctly dispose of a couple’s previously acquired community property, in 1971 the Uniform Law Commission (ULC) promulgated the Uniform Disposition of Community Property Rights at Death Act (henceforth, “the act”). The act defines two types of property to which it applies:
- All or the proportionate part of personal property, wherever situated, that was acquired as, or became and remained, community property under the laws of another jurisdiction, and any proceeds or property traceable to the community property; and
- All or the proportionate part of real property situated in the enacting state that was acquired with proceeds from, or traceable to property acquired as, community property under the laws of another jurisdiction.
Note that the act potentially applies to property acquired under the community property laws of any jurisdiction, whether foreign or domestic. The federal tax basis rules are limited, however, to property held under the community property laws of a US jurisdiction.
To help probate courts determine whether the act applies to particular property, the act sets out two rebuttable presumptions:
- All property acquired during marriage by a spouse while domiciled in a community property jurisdiction is presumed to be property to which the act applies, and
- Any real property situated in the enacting state, and personal property wherever situated, acquired during marriage while domiciled in a common law jurisdiction is presumed not to be property to which the act applies if titled in a form that creates rights of survivorship.
Sometimes, only a portion of a decedent’s property will be community property. Consider, for example, a married couple domiciled in California, a community property state. The couple buys a home, then after five years sells their California home and uses the proceeds for a down payment on a new home in Illinois, a common law state. The couple then proceeds to make mortgage payments for another ten years from income earned while domiciled in Illinois. If one of the spouses dies, only the portion of the Illinois home traceable to the California property should be considered community property for estate settlement purposes.
When the enacting state’s probate court determines the estate includes community property to which the act applies, the rules for disposition of that property are simple: One half of the property is the property of the decedent’s estate and is distributed according to the terms of the will or the law of intestate succession. The other half of the property belongs to the surviving spouse and is not part of the estate. The half of any community property included in the decedent’s estate is not subject to any right of the surviving spouse to elect against the will.
The act includes liability shields for personal representatives and courts. Unless there is a written demand by a surviving spouse or an heir, devisee, or creditor of the decedent, the court and the personal representative have no duty to inquire whether any property held by the estate, or by the surviving spouse, is subject to the act.
Finally, the act protects purchasers for value and lenders who take a security interest in property subject to the act. They take their interest free of any rights of the decedent’s surviving spouse, heirs, or devisees. But the proceeds of any sale or creation of a security interest are treated in the same manner as the property interest transferred—based on whether the property was acquired as or is traceable to community property.
Time for an Update
The act has been adopted by 16 common law states. The 1971 act, however, is currently undergoing review and revision by a ULC drafting committee. Questions to be considered include:
- Should the act provide additional guidance to help courts determine whether, and how much of, a decedent’s property is “traceable” to community property?
- Does the act use outdated terms that do not account for same-sex marriage or that fail to recognize the ability of domestic partners to acquire community property?
- What standard of proof is necessary to rebut the act’s rebuttable presumptions as to the nature of property?
- Should the personal representative have a duty to discover, or at least attempt to discover, whether property held by the estate is community property?
- Are the rights of creditors appropriately balanced with those of spouses and successors?
- Should the act expressly provide a method to opt out of its default rules or to alter the spouses’ property interests?
- Should the act take account of the prevalence of nonprobate transfers, which have become more important since the promulgation of the act?
- Should the act recognize the existence of various equitable remedies available in community property states designed to protect each spouse’s interest in the community?
The committee will read its draft revision for comment at the ULC’s upcoming 2020 annual meeting and meet again periodically for further drafting before possible approval of the final revised act in summer 2021. All ULC drafting projects are open for interested observers to participate, and the committee’s work product is posted on the ULC website for comments from the public. For more information, see www.uniformlaws.org.