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Money January 2017

Dollar Sense

Thinking of Moving to a Different State? Differing Property Rules Can Cost You a Lot

By Teresa Ambord

Separate property does not automatically convert to community property, nor does community property automatically become separate...Couples who change states sometimes sign agreements meant to protect their property rights, only to end up with some unpleasant surprises.

Nine of the United States are community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

If you live in one of those states you probably are aware that any property acquired by either spouse (even if it is separately titled) belongs to you and your spouse with an undivided half interest. When one spouse dies, his or her share of community property passes to the survivor, unless the deceased spouse had a will that says otherwise.

Non-community property states are generally “separate property” states. In those states married individuals retain sole ownership rights to whatever they earn, unless they choose otherwise. Suppose you have lived your whole married life in a separate property state and then you move to a community property state, or vice versa. It’s important to know that property generally retains the character it had before the move. Separate property does not automatically convert to community property, nor does community property automatically become separate.

The fact that your property will probably retain its character could benefit you, or harm you, depending on what you do and what you intend. Couples who change states sometimes sign agreements meant to protect their property rights, only to end up with some unpleasant surprises. That’s why it’s important to seek the counsel of an estate specialist in your new state before you take action.

 

Possible Problems

According to the estate specialists at Thomson Reuters, one common mistake that couples make — for example, when moving from a community property state —is to convert their community property to jointly held property. The idea seems sound. But community property has tax advantages that are lost when the character of the property is changed. In the end, a surviving spouse will likely pay higher capital gains taxes when selling jointly held property. If the couple had done nothing, their community property would probably have retained its character from the community property state they left. If this describes your situation, consult a professional advisor to make sure of your new state’s rules.

What about moving from a separate property state to a community property state? You may assume that your property remains separate, and depend on that to maintain your intended estate plan. But some states take a “quasi community property” approach. That means property that would’ve been community property if you’d lived in the new state all along, is treated as community property, by your new state, in spite of your wishes.

 

Don’t Assume

Before you move, find out how your new state will affect your property rights. Consult an estate attorney to find out if you’ll need to modify your will, establish a trust, or use other tools to ensure your estate plan operates as you intended.

 

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

Meet Teresa