Community Property: General Considerations (Portfolio 802)

Tax Management Portfolio, Community Property: General Considerations, No. 802-2nd, discusses the origins, the general characteristics, and the federal income, gift, estate, and generation-skipping transfer tax aspects of community property.

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Tax Management Portfolio, Community Property: General Considerations, No. 802-2nd, discusses the origins, the general characteristics, and the federal income, gift, estate, and generation-skipping transfer tax aspects of community property. The 10 states in which some form of community property is in effect are: Alaska (elective), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
This Portfolio describes the general characteristics of community and separate property, as well as those of combined community and separate property. It also describes the application of the gift, estate, and generation-skipping transfer tax laws to community property, and the application of the income tax laws to community property in estate planning.
Community property is a form of co-ownership between a husband and wife in which each spouse owns an undivided one-half interest in each item of community property onerously acquired during marriage, regardless of the manner in which the property is titled. Community property ownership exists between a husband and wife, and all property acquired out of earnings during marriage is presumed to be community property. In addition, the proceeds of, and the income earned with respect to, community property are themselves treated as community property. In about half of the community property states, the income from a spouse's separate property is also treated as community property. All property acquired before marriage, after its termination, or by gift, devise, bequest, or inheritance is separate property. Gifts of community property can generally be made only with the consent of both spouses. In some community property states, spouses are free to establish their own rules as to the character of property already acquired or which will be acquired as community or separate property.
A gift of community property is generally treated as a gift by each spouse of a one-half interest in the property. Section 2033 generally requires inclusion in a decedent's gross estate of the value of all the decedent's separate property and the value of one-half of all of the community property. The estate tax consequences of owning various types of community property are discussed in detail, as is the deductibility of administrative expenses and losses.
This Portfolio may be cited as Treacy, 802-2nd T.M., Community Property: General Considerations.

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Gerald B. Treacy, Jr., B.A., Rider College (1973), summa cum laude; J.D., University of California at Los Angeles School of Law (1981), Order of the Coif; Gibson Dunn & Crutcher, Los Angeles, California (1981-82); Perkins Coie, Seattle and Bellevue, Washington (1982-94, partner 1991-94); McGuire Woods Battle & Boothe, Tysons Corner, Baltimore and Washington, D.C. (partner, 1994-96); Author, 459 T.M., Supporting Organizations; Author, Washington Guardianship Law, Administration and Litigation (3d ed. 1997); Fellow, American College of Trust and Estate Counsel; member of the Bar of California (inactive), and member of the Bars of District of Columbia and Washington State.


Detailed Analysis

I. Introduction

II. Summary of Community Property Law

Introductory Material

A. Origins of Community Property

B. Community Property Jurisdictions

C. Existence of Marriage

D. Attributes of Community Property

1. Equal Management Power

2. Acquisition

E. Attributes of Separate Property

1. Description

2. Acquisition

F. Combined Community and Separate Property

1. Improvements

2. Acquisitions over Time

G. Debts and Liabilities

H. Acquisitions While Living Separate and Apart

I. Dissolution of the Community

J. Choice of Law Problems

K. Federal Preemption

L. Alaska Community Property Act

III. Income Taxation of Community Property

A. Importance in Estate Planning

B. Income Tax Return for Year of Death

1. Return

2. Gross Income: Joint Return

3. Deductions

a. Medical Expenses

b. Contributions, Taxes, and Other Deductible Expenses

4. Portion of Joint Tax Liability Attributable to Decedent

5. Withholding; Estimated Payments

6. Surviving Spouse's Return

C. Stepped-Up Basis

1. Carryover Basis

2. Community Property - Step Up in Basis for Surviving Spouse's One-Half Share of Community Property

3. Income in Respect of a Decedent

D. Holding Period

IV. Estate Tax Consequences

A. Property Owned at Death

B. Community and Separate Property

1. “Expectant Interest” Community Property

2. New Mexico Community Property

3. Community Property Passing at a Death Occurring Between October 21, 1942 and December 31, 1948

4. Community Property Created by the Commingling of Separate Property

5. Community Income Arising out of Separate Property

6. All Other Community Property

C. Effect of Interspousal Agreements

D. Transfers by Will and by Intestacy

E. Reliance upon Record Title

F. Federal Preemption Property

G. Character of the Income from and Reinvestments in Property

H. Effect of Dower and Curtesy Rule

I. Transfers Within Three Years (or in Contemplation) of Death

J. Incomplete Transfers

1. Transfer with Retained Life Estate

a. General Rule

b. Community Character of Income from Separate Property

c. Character of the Power of Management

d. The Widow's Election

e. The Danger of Converting Community Property into Separate Property

2. Transfers to Take Effect at Death

3. Revocable Transfers

K. Annuities

L. Joint Interests

1. General Rule

2. Survivorship in Joint Tenancy Community Property

3. Conversion of Joint Tenancy Community Property into Separate Property

4. Federal Preemption and Joint Tenancy Property

5. Effect of § 811(e) of the 1939 Code

6. Decedents Dying After 2009

M. Powers of Appointment

1. Powers Conferred upon the Wife

2. Powers Conferred upon the Husband-Manager

N. Life Insurance

1. Life Insurance Proceeds Receivable by the Executor - § 2042(1)

2. Life Insurance Proceeds Receivable by Other Beneficiaries - § 2042(2)

3. Imputed Incidents of Ownership - Regs. § 20.2042-1(c)(6)

4. Inclusion in Gross Estate of Noninsured Spouse Who Predeceases Insured - § 2033

5. Inclusion of Proceeds of Policy in Gross Estate of Noninsured Spouse Who Survives Insured - § § 2033, 2036–2038, and 2041

6. Inclusion of Proceeds of Policy Transferred by Insured Within Three Years of Death - § 2035

7. Characterization of Interests in Life Insurance Policies and Proceeds Under Local Law

a. In General

b. Apportionment Theory

c. Inception-of-Title Theory

d. Term Life Insurance: Risk Payment Doctrine

8. Simultaneous Death

9. Caveat: Effect of the Revenue Act of 1942

O. Marital Deduction Property - § 2044

P. Expenses, Indebtedness, and Taxes - § 2053

1. Funeral Expenses

2. Administration Expenses

3. Claims, Mortgages, and Other Encumbrances

Q. Losses - § 2054

R. Transfers for Public, Charitable, and Religious Uses - § 2055

S. The Marital Deduction - § 2056

1. The Law Prior to 1976

2. 1976 Liberalization of the Marital Deduction

3. The Special Definition of Community Property

4. The Law After 1981

5. Reduction of Marital Deduction in Widow's Election Cases - § 2056(b)(4)

6. Credit for Tax on Prior Transfers - § 2013

T. Former Estate Tax on Excess Accumulations

U. “Temporary” Estate Tax Repeal

V. Gift Tax Considerations

A. Transfers of Property by Gift

1. General Rule

2. Repealer Jurisdictions

3. Gifts Made Between January 1, 1943 and April 2, 1948

B. Forms of Transfer

1. Conversions into Separate Property

2. Commingling

3. Joint Ownership Forms

a. Survivorship Community Property

b. Agreements Governing Disposition of Community Property upon Death of a Spouse

c. Transfer of Community Property into Joint Tenancy with Right of Survivorship

d. Transfer of Community Property into Tenancy in Common

e. Agreements Regarding Character of Future Earnings

4. Disclaimers - § 2518

C. Incomplete Transfers

1. Effect of State Law Restrictions on Transfer of Community Property

2. Transfers to Revocable Trusts

D. Consideration

1. In General

2. Divorce and Annulment - § 2516

3. The Widow's Election

a. Pre-October 9, 1990 Rules

b. Post-October 8, 1990 Rules

c. Income Tax Consequences

E. Annuities - Former § 2517

F. Powers of Appointment - § 2514

G. Life Insurance

1. In General

2. Transfers by the Surviving Spouse at the Death of the Insured

H. Deductions

1. The Charitable Deduction - § 2522

2. The Marital Deduction Before 1982

3. The Marital Deduction After 1981 - § 2523

VI. The Generation-Skipping Transfer (GST) Tax

A. Introduction

B. GST Tax - 1976 Version

C. GST Tax - 1986 Version

D. Temporary “Repeal” for 2010 Transfers

E. Community Property Aspects

VII. Valuation

Introductory Material

A. Flower Bonds

B. Valuation Setoff Under § 2043; Application of Actuarial Tables

C. Special Use Valuation - § 2032A

D. Minority and Fractional Interest Discounts


Working Papers

Table of Worksheets

Other Sources

Worksheet 1 IRS Publication 555, Federal Tax Information on Community Property

Worksheet 2 Uniform Disposition of Community Property Rights at Death Act

Worksheet 3 Representative State Statutes

Worksheet 4 Community Property Agreement





Treasury Rulings