Estate Planning for Married Couples on the Move

Our normal process for new estate planning clients is to have them complete an Estate Planning Questionnaire.  Normally, most of the questions on this form arouse no comments.  However one question often does pique the interest of married clients; that is the question of whether as a married couple they have ever lived in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin. 

We ask because these states, known as “community property states,” treat marital property far differently than the other 41 states and that treatment lasts even if the couple moves to a “separate property state” like Pennsylvania.

In Texas, for example, if John and Marsha are married and John earns $200,000.00 during the marriage, then those earnings are owned 50% by John and 50% by Marsha.  If those earnings are put into a bank account titled solely to John or used to buy a property titled solely in John’s name, both the bank account and the property would be owned 50% by John and 50% by Marsha.  John and Marsha would each own an “equal undivided interest” that either could pass by their will.  In Pennsylvania, in contrast, the earnings, the bank account solely titled to John, and the real estate solely titled to John would only be owned by John – those assets would pass by his will or by intestacy.

If John and Marsha move to Pennsylvania from Texas, the character of the ownership of the property does not change.  A Pennsylvania estate planner would need to know this (hence the question on the Questionnaire).  Absent this information, he might assume that one spouse, like John in our example, had a much larger estate than the other spouse (when the estates are probably much closer to equal), he could misadvise the couple on the effects of their estate plan (particularly if the couple have beneficiaries other than each other), and he could mis-administer the estate of either spouse after death (again, particularly if there are beneficiaries other than the surviving spouse).  

Finally, community property has one major income tax advantage that can too easily be lost in the case of an interstate move.  Upon the death of either spouse both halves (i.e., all) of the basis in the community property assets gets “stepped-up.”  Lawyers have a tendency to do what they have done in the past, and a Pennsylvania lawyer might advise the couple to re-title the property as “tenants by the entireties” (the standard for a married couple in Pennsylvania).  This re-titling would result in a step-up in only one half of the basis of the marital assets upon the death of the first spouse.  Consequently, under most circumstances, it would result in a larger tax bill when the surviving spouse sells the property, a problem of real practical concern. 

The larger lesson is this – people are often told that there wills are “moveable” documents that will “travel with them through life.”  However, moving from state to state may have consequences on your overall estate plan and its effects on your loved ones.  It is important that your new estate planner understands these consequences.

– Rod Fluck



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