Written by Gerry W. Beyer, JD, LLM, JSD
Whenever you plan for married clients, it is vital to know what property your clients own and what their spouses own. However, clients are often unclear about ownership and may be unsure whether an asset is owned individually or jointly by the spouses. Because two different marital systems are recognized in the United States, title alone does not always determine who truly owns the property. This article is designed to shed light on this key estate planning issue.
MARITAL PROPERTY SYSTEMS
Common Law
States that follow the English common law marital property system treat spouses like strangers for purposes of determining asset ownership. In other words, what each spouse acquires by earnings, gifts, inheritances, or otherwise belongs to the spouse who earned or acquired it. The nonowner spouse has no rights regarding any of this property unless the owner spouse affirmatively transfers an interest in it to the nonowner spouse during life, such as by gift or by adding the nonowner spouse as a joint owner, or unless the nonowner spouse receives it at the owner spouse’s death through intestacy, under the terms of the owner spouse’s will or trust, or by beneficiary designation or other nonprobate transfer.
To protect a surviving spouse from being disinherited or receiving a relatively small share of the deceased spouse’s estate, nearly all common law states give the surviving spouse a statutory right to an elective, or forced, share of the deceased spouse’s estate. This share is in lieu of the benefits, if any, provided to the surviving spouse in the deceased spouse’s will. The surviving spouse is entitled to this statutory amount regardless of the deceased spouse’s intent as documented in the will.
The states vary tremendously with regard to the method used to compute the surviving spouse’s forced share. Accordingly, the specific formula under the governing state law must be considered when drafting a will (and in some cases, a trust) for a client who desires to primarily benefit someone other than the surviving spouse, such as a charity or children from another partner. Commonly used schemes include (1) a fixed percentage of the net probate estate, (2) a fixed percentage of the net probate estate adjusted downward if the deceased spouse had children, (3) a minimum dollar amount plus a fixed percentage of any additional property in the net probate estate, and (4) percentages that vary depending on the length of the marriage.
Many common law state statutes apply the elective share formula to an augmented estate rather than the net probate estate. The augmented estate typically includes the value of statutorily specified nonprobate assets, such as the deceased spouse’s share of jointly held property passing by right of survivorship and life insurance proceeds payable to beneficiaries other than the surviving spouse. The augmented estate concept prevents the deceased spouse from reducing the surviving spouse’s elective share by using probate avoidance techniques to dispose of the property.
Community Property
A significant minority of states depart from the separate property system and instead follow a community property regime based on the civil laws of France and Spain. Today, nine states apply the community property model: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, spouses are treated as being in a true partnership and thus own undivided interests in the property they acquire from earnings during marriage. The moment a spouse earns a dollar, each spouse actually owns fifty
cents. The surviving spouse does not need a forced share to be protected from disinheritance because the surviving spouse already owns one-half of the community property. Generally, the deceased spouse’s estate plan may not dispose of the surviving spouse’s share of the community property without the survivor’s consent.
Among the community property states, there is a split between those that follow the civil law rule (Idaho, Lousiana, Texas, and Wisconsin) and those that follow the American rule (Arizona, California, New Mexico, Nevada, and Washington), and they differ on several important treatments, including how income from noncommunity (separate) property is classified. In states that follow the civil law rule, income from noncommunity property will also be community property. In states that follow the American rule, however, income from separate property remains separate despite being earned during the marriage.
Finally, in community property states. . .
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