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Craig's Corner - Wealth Planning Insights

Thursday, July 21, 2016

The Effects of Living in a Community Property State

How does living in a community property state like Nevada affect you?

In most states in the U.S. married couples are considered separately when it comes to financial matters, except when they share joint accounts. In the community property states, however -- Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin -- different rules apply.

In these states everything acquired during your marriage is considered legally owned by both partners, as if they are equal co-owners of a business. In investigating the repercussions of community property laws and their effects on your assets and your marriage (or possible divorce), you should consult with a knowledgeable wealth preservation and estate planning attorney.

There are pros and cons to community property laws, depending on each individual situation. If you live in such a state, or are planning to relocate to one, it is important to be aware of the following:

Premarital Assets

Even in community property states, wealth gained prior to the marriage, and inheritances acquired by one spouse at any point during the marriage, are excluded from the community property designation. Assuming you want to keep such assets separate, all you have to do is make sure not to integrate them into the family finances. For example, don't have your postmarital paychecks deposited into an investment account you had before you were married. In many cases, of course, couples want to join their assets. If this is true in your case, you should investigate signing prenuptial or postmarital agreement to pool your funds.

Gifting

This is where community property laws become strange. In community property states, both spouses must also agree on any gifts paid for with joint funds. This means that neither spouse can legally give a gift out of their merged money to anyone without the approval of his or her partner. Because consent must be legally given, to be completely safe married couples should give one another written consent when gifts are given, even when those gifts are going to close relatives or charitable organizations. Odd as it seems, even when giving sizable gifts to one another, there should be a paper trail to avoid future confusion or conflict.

Estate Plans

In most states, a married couple's assets are evenly divided in death as in life, so half of the couple's assets become part of the estate. Sometimes this works well, but sometimes it results in a substantial tax bill for the remaining partner. Complications arise, for example when a house has appreciated significantly in value during the marriage by the time one spouse dies, resulting in the surviving spouse owing capital gains tax. In some states, it is even possible for the surviving spouse to lose ownership of the deceased share of the property if he or she is not named specifically in the will.

In these situations, residents of community property states have a great advantage because they own the house equally and its increased value belongs to both of them. If the surviving spouse sells the home, therefore, there is no capital gains tax owed.

Life Insurance Policies

Couples who live in community property states, like Nevada, have to be particularly careful when creating irrevocable life insurance trusts. The partner purchasing the life insurance trust has to pay the premiums from a non-community property account. If the premiums are paid for from a joint account, a portion of the trust is put into the spouse's estate, thus defeating the purpose of having an irrevocable life insurance at all. In this situation, it's best for the couple to sign a transmutation agreement, a document that makes the gifts to the trusts wholly individual.

Interestingly enough, if community property laws are beneficial in your particular situation, you can carry community property with you if you relocate to another state.

Once you realize the complexities of living in a community property state, you recognize the need for consulting with a skilled wealth preservation attorney regarding your estate planning. The extensive knowledge of an expert in the field can clarify your options and prevent you from making costly mistakes.


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S. Craig Stone II of Stone Law Offices, Ltd. serves clients throughout Clark County, Southern NV, Las Vegas, Henderson, Boulder City, North Las Vegas, Summerlin, Carson City, Reno, Washoe County, and Nye County. Also serving clients with asset protection nationwide.



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