Jordan Sprechman

Practice Lead, U.S. Wealth Advisory

As a result of the COVID-19 pandemic, many couples changed where they live, work and raise their families – and, to their surprise, found themselves governed by a new set of property rules that upended their estate plans, including income and transfer taxes.

Now, with mortgage rates easing and the spring home buying season about to begin, you may be contemplating a similar out-of-state move. Before you buy a home, we strongly advise you to understand your new state’s property rules, as they can be dramatically different in other parts of the country with respect to holding, selling, encumbering and disposing of an asset:

  • 35 or so states view marital assets as separate property; within their borders, titling dictates ownership
  • Nine states deem assets acquired during a marriage to be community property: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin
  • Five states – Alaska, Florida, Kentucky, South Dakota and Tennessee (the so-called opt-in community property states) – allow married couples to create community property trusts.

Here’s what to keep in mind if you plan to relocate.

Separate property states

As noted above, in the majority of states, the rules are fairly simple: Titling dictates ownership. As an example:

If a wife owns an asset in her own name, then she has the exclusive power to sell the asset, borrow against it, pledge it as collateral, and dispose of it under the terms of her will.

In the absence of a pre-nuptial or other marital agreement, or an ability to trace that asset to a gift or inheritance the wife received, her husband may have certain rights to that property – or at least to the value it represents – in a divorce or upon her death.

But, the wife is the only person who can act in any way with respect to that asset (unless she has given someone power of attorney).

Community property states

By contrast, the titling of assets between spouses living in a community property state is basically irrelevant. (Again, there may be an exception if there is a superseding marital agreement, or if the property was gifted or inherited.)

In these nine states – property laws apply only to married couples – each spouse can act with respect to all property owned by the “community” (of two); this includes selling or encumbering the property.

By extension, the marital community is generally responsible for debts incurred by either spouse, and creditors of either spouse can satisfy a valid claim from any community property. On the death of one spouse, one-half of the property is disposed of under the terms of the decedent’s will; the other half is the survivor’s property.

Opt-in community property states

Some separate property states allow married residents to transfer property ownership to a community property trust, thereby giving couples the benefits – and burdens – of community property ownership.

It remains uncertain how the Internal Revenue Service will treat assets owned in community property trusts for the purposes of determining, among other things, to what extent these assets would be entitled to a step-up in basis to date-of-death value on the passing of one spouse. (This is what happens now when one spouse resident in a community property state dies.) However, more and more residents of the five opt-in community property states are creating community property trusts.

Next steps

Married couples who move from community property states to separate property states – and vice versa – should speak with their professional advisors, including their J.P. Morgan team, to gain a full understanding of which assets are separately owned and which are community property.

To oversimplify: Once assets are community property, they generally stay as such, even if the couple moves to a separate property state – unless the couple takes affirmative steps to transmute the property into separate property.

For instance, property owned by a married couple moving from California to Wyoming would retain its character as community property no matter how long the couple lives in Wyoming – unless they document a transmutation, such as transfer of that property to new accounts.

Conversely, property owned by a married couple relocating from a separate property state to a community property state will, in time, acquire the status of quasi-community property (basically the same thing as community property) – unless, again, the couple affirmatively takes steps to have those assets treated as being held in some other way.

In all cases, a clear knowledge of how a married couple’s assets are owned is essential to the proper management of their wealth. We thus suggest that everyone – especially those who have ever relocated from one type of state to another – should check to make sure their expectations with respect to ownership are being met.

We can help

A J.P. Morgan advisor can work with you and your legal advisors to better understand how moving to another state may impact your wealth and estate plans.

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