When most married couples start working on estate planning in earnest, they tend to think about their long-term goals first, such as how to leave property to their children or grandchildren and how to avoid taxes upon death. However, when couples consider their deaths as part of their estate planning, it is natural to think of it as something that will not happen until far into the future.
But what if you or your spouse were to die suddenly? What would happen to the property that you presently own? Would your property pass directly to your spouse? What if you wanted your property to go to someone else? All of these questions are real scenarios that can and have happened to people in the past.
Jump ahead to these sections:
- Inheritance, Community Property, and Marriage Explained
- How You Can Make Sure Your Community Property Gets in the Right Hands When You Die
Planning for unexpected situations can make it easier on yourself and your loved ones, especially when it comes to dealing with estate property. If you or your loved ones happen to have community property, or separate property, you can learn more about what to do below.
Inheritance, Community Property, and Marriage Explained
When one spouse in a marriage dies, they have a right to pass on their property to others upon their death. They can do this in two ways:
Through a last will and testament (a “will”). When a person dies with a will, the person names other people (“beneficiaries”) to inherit their property when they die. This can be the person’s surviving spouse or someone other than their spouse.
Through “intestacy.” When someone dies without a will, they die “intestate.” To distribute their property, a probate court will conduct a process called “intestacy,” where the property is distributed according to state laws. These laws are set in place to identify the legal heirs of the deceased person set to inherit their property. In almost all states, the first legal heir to be able to inherit through intestacy is a surviving spouse.
Whether property is inherited through a will or intestacy, the persons receiving the property are clearly identified as either “beneficiaries” named in a will or “legal heirs” as defined by state law. The property to be distributed is also clearly identified. It is the property described in the will or the property existing in the decedent spouse’s estate when they die.
Property in a decedent spouse’s estate when they die can consist of two different types:
Separate property. When a spouse dies, they are allowed to distribute their separate property any way they want. Separate property will be defined by state law and will usually include the following:
- Property acquired before the marriage.
- Property obtained as a gift.
- Inherited property.
- Property acquired during the marriage but that the spouses define or treat as one spouse’s separate property (this property is said to be “transmuted” from community property to separate property).
Community property (also called “marital” property). Community property also will be defined by state law and normally will include:
- Property acquired through the income or efforts of both spouses during the marriage.
- One spouse’s separate property that the spouse gifts to the marriage or that the spouses define or treat as community property (this property is said to be “transmuted” from separate property to community property).
When a couple is married, the property they possess will consist of each of their respective separate property and their joint community property. Generally, each spouse is entitled to 100 percent of their separate property and 50 percent (half) of the community property. So, when one spouse dies, what happens to the community property can depend on a couple of factors.
In what state was the spouse domiciled when they died?
When someone dies, the law that applies will be the law of the state in which the person was domiciled when they died. With very few exceptions, every state will be identified as one of the following types of state with respect to the distribution of property upon death:
“Community property” state
When a spouse dies domiciled in a community property state, the community property is considered to be owned equally by the spouses. So the surviving spouse will be entitled to their half of the community property. If the spouse who died had a will, they may distribute only their half of the community property. If they died intestate (without a will), their half of the community property automatically will pass to the surviving spouse.
There are nine states that identify as “community property” states. These include:
- New Mexico
“Common law” state
With very few exceptions for states that allow parties to “opt-in” to the community property system (Alaska, South Dakota, Tennessee), all other states are considered “common law” states. These states identify ownership of property based on which spouse is listed on the title to the community property. What happens to the community property when one spouse dies will depend on how the property is titled.
How is the property titled?
When both parties acquire community property during the marriage, it may be titled in different ways. The way the property is titled determines what happens to the community property when one spouse dies.
- “Joint tenancy with right of survivorship” or “Tenancy by the entirety:” Property titled this way will automatically pass to the surviving spouse when one spouse dies, even if the spouse who died includes this property in their will.
- “Tenancy in common:” If community property between spouses is titled this way, each spouse has a right to distribute their half interest in the property any way they wish, even to someone other than their spouse. If a spouse dies without a will, property held as tenants in common will pass through intestacy.
How You Can Make Sure Your Community Property Gets in the Right Hands When You Die
It is not uncommon for one spouse to want to leave their separate and community property to their surviving spouse when they die. This can happen automatically in the following cases:
- The spouse left their property to the surviving spouse in their will
- The spouse died intestate in a community property state
- The spouse died intestate in a common-law state and the property was held as a joint tenancy with right of survivorship or a tenancy by the entirety
However, some married couples can encounter issues when one spouse wishes to give their one-half of community property to someone else that is not their other spouse. For example, if you and your spouse purchase a boat during your marriage, the boat is considered community property and you each own a one-half interest in the boat. But what if you want to leave the boat to your sibling in your will? One of these three things can happen:
- If you die intestate in a community property state, the property automatically will pass to your spouse.
- If you die in a community property state with a will, you may leave your one-half interest in the boat to your sibling but are not allowed to leave any more than that.
- If you die in a common-law state and the property is jointly titled with survivorship or as tenancy by the entirety, the boat will automatically pass to your spouse.
However, there are several ways to ensure that when you die, your sibling can inherit your boat, even though the boat is considered community property:
For example, in a community property state, you and your spouse may agree to treat (also known as transmute) the boat as your separate property, which you may then pass to a named beneficiary (your sibling) in your will. In a common-law state, you may title the boat solely in your name and name your sibling as the beneficiary of the boat in your will as well.
If you want to make sure that the boat passes solely to you in the event that your spouse dies before you do, your spouse will have to list you as the beneficiary in their will for their half interest in the boat. In the event that your spouse dies intestate in a community property state, you must be defined under state law as the first heir to inherit through intestacy.
But, all these things may not matter if your spouse dies intestate in a common-law state. In that case, you can hold title to the boat jointly with survivorship or as tenants by the entirety.
How to Handle Community Property When One Spouse Dies
What happens to community property when one spouse dies can be a moving target, depending on what state you live in and how the community property is titled during the marriage.
To control what happens to community property upon death, you cannot rely on the law in your state to just give it to you. You must be strategic in planning when the property is acquired and how the property is titled.
This article describes the factors you must consider when planning for the disposition of community property when you or your spouse die. If your estate plan will not accommodate your wishes for disposing of your community property, you should consult with an attorney or estate planner to discuss all of the options described here and strategize accordingly.