How It Affects Estate Planning
Not all states treat marital property the same way. Whether you live in a community property state or a common law (separate property) state can significantly impact inheritance, taxes, and asset distribution.
Here’s a side-by-side comparison:
| Topic | Community Property States | Common Law (Separate Property) States |
|---|---|---|
| Who Owns Property Acquired During Marriage? | Both spouses automatically own 50/50, regardless of whose name is on the asset (with some exceptions). | The spouse whose name is on the asset typically owns it, unless jointly titled. |
| States That Follow This Rule | AZ, CA, ID, LA, NV, NM, TX, WA, WI (and AK by agreement) | Most other states, including PA, NJ, NY, FL, etc. |
| What Happens at Death (No Will)? | Deceased spouse’s 50% passes according to Will or state law; surviving spouse already owns their 50%. | Property titled in the deceased spouse’s name passes according to Will or intestacy law. |
| Step-Up in Basis (Capital Gains Tax Benefit) | Often a full step-up in basis on both halves of community property when one spouse dies. | Usually only the deceased spouse’s share receives a step-up in basis. |
| Can One Spouse Leave Everything to Someone Else? | Only their 50% share of community property. | Generally yes, but elective share laws may protect the surviving spouse. |
| Creditor Exposure | Debts incurred during marriage may affect community property. | Debts are usually tied to the individual spouse who incurred them (with exceptions). |
| Estate Planning Flexibility | Some built-in spousal protections; may reduce need for certain trust strategies. | Often requires more careful titling and planning to protect surviving spouse. |
Why This Matters for Estate Planning
1. Tax Consequences
Community property states often provide a significant tax advantage through a double step-up in basis, which can reduce capital gains taxes if assets are later sold.
In common law states, only the deceased spouse’s portion typically receives that tax benefit.
2. What You Can Leave to Others
In community property states:
- You only control your half of community property.
In common law states:
- Ownership depends largely on how assets are titled.
- However, most states have “elective share” laws that prevent disinheriting a spouse entirely.
3. Trust Planning Differences
Community property may:
- Simplify certain marital trust planning
- Reduce capital gains exposure at first death
Common law states may require:
- More strategic titling
- Use of revocable trusts
- Careful coordination of beneficiary designations
Important Note
Even in community property states:
- Gifts and inheritances received by one spouse are often considered separate property
- Property can sometimes be converted between separate and community by agreement
- Titling and commingling matter
And in common law states:
- Joint ownership can override default rules
- Beneficiary designations override a Will
Bottom Line
Where you live — and how your property is titled — directly affects:
- Who inherits
- What taxes may be owed
- How much flexibility you have in planning
- What protections your spouse receives
Estate planning is not one-size-fits-all. State law matters.
