Community Property vs. Non-Community Property States: Estate Planning Considerations

Estate planning is never one-size-fits-all. One of the most important—but often overlooked—factors is whether you live in a community property state or a common law (non-community property) state. This distinction can significantly affect how assets are owned, transferred, and taxed, and should guide how you structure your will and trusts.

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1. What Is Community Property?

In a community property state, most property acquired during a marriage is considered equally owned by both spouses—regardless of whose name is on the title. This typically applies to:

• Income earned during the marriage

• Real estate purchased during the marriage

• Investments and retirement accounts funded with marital earnings

Examples of community property states include:
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin (Alaska has an optional community property system).

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2. What Is Separate Property?

In both community property and common law states, certain assets are typically considered separate property, including:

• Property owned before marriage

• Inheritances or gifts received by one spouse

• Certain personal injury settlements

Key difference: In a community property state, separate property remains yours, but income or appreciation from that property may become community property depending on state law and how it’s managed.

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3. How Common Law (Non-Community Property) States Differ

In a common law state, property ownership is generally determined by title. If only one spouse’s name is on the deed or account, it is considered that spouse’s property—unless the spouse chooses to jointly title it.

When one spouse dies, the surviving spouse may still be entitled to a share of the estate under elective share laws, but this is different from the automatic 50/50 ownership in community property states.

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4. Impact on Estate Planning

A. Wills

• Community Property States: Your will can only control your half of the community property plus any separate property you own.

• Common Law States: Your will can dispose of all property you solely own, but your spouse may have elective share rights.

B. Trusts

• Revocable Living Trusts: In community property states, couples often use a joint trust for community property to simplify management and to ensure both halves receive a full step-up in basis at the first spouse’s death (potentially reducing capital gains tax for heirs).

• Separate Property Trusts: Individual trusts are still useful for separate property—such as inheritances or pre-marriage assets—to keep them legally distinct.

C. Tax Considerations

• Community property can provide a full step-up in basis for both halves of the property upon the first spouse’s death, which may significantly reduce capital gains taxes.

• In common law states, generally only the deceased spouse’s half of jointly owned property receives a step-up in basis.

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5. Joint vs. Individual Trusts in a Community Property State

When to Choose a Joint Trust

A joint trust is often the preferred option for married couples in community property states because:

• Unified Management: All community assets are managed in one trust, making administration simpler during life and after death.

• Tax Advantages: At the first spouse’s death, both halves of community property typically receive a step-up in basis, reducing capital gains taxes if assets are sold.

• Streamlined Administration: Upon the first death, there’s often no need to split assets into separate survivor/decedent shares unless for tax planning purposes.

When to Use Individual Trusts

Even in a community property state, separate trusts may be better if:

• You have significant separate property and want to keep it legally distinct.

• You’re in a blended family and want to ensure certain assets pass directly to your own children.

• You have asset protection concerns or want more control over how each spouse’s assets are distributed.

Best Practice: Many couples use a hybrid approach—placing community property in a joint trust and keeping separate property in individual trusts. This maximizes tax benefits while preserving flexibility and legal clarity.

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6. Practical Example

Scenario 1 – Joint Trust in a Community Property State:
John and Mary live in Texas. They place their jointly owned home, investments, and savings (all community property) into a joint trust. When John dies, Mary becomes sole trustee, retains control of the trust assets, and benefits from a full step-up in basis on both halves of the property.

Scenario 2 – Separate Trusts for Separate Property:
Mary inherited a vacation home before marriage. She keeps it in her individual trust. This ensures that when she dies, the property passes to her children from a prior marriage, not John’s heirs.

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7. Why You Should Consult an Attorney

Because state property rules directly affect what you can give away, how assets transfer, and the taxes owed, estate planning without considering your state’s property system can lead to:

• Unintended disinheritance of a spouse

• Higher capital gains taxes for heirs

• Probate complications

An experienced estate planning attorney can help you:

• Determine which of your assets are community vs. separate property

• Decide between joint, separate, or hybrid trust structures

• Draft wills and trusts that respect state law and your wishes

• Plan for blended families or special situations

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Bottom Line

In community property states, a joint trust is often advantageous for community assets due to its simplicity and tax benefits, but individual trusts may still be important for protecting separate property and honoring complex family arrangements. Understanding your state’s property rules is foundational to protecting your loved ones and your legacy.

Community Property vs. Common Law (Non-Community Property) States

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 Joint Trust vs. Individual Trusts in a Community Property State