Understanding Community Property
New Mexico is one of nine community property states in the country. When you hear the term “community property,” you may think of divorce, and, yes, that is the context in which the phrase is most often referenced. Divorcing couples need to divide their marital property, and community property laws dictate how they do so. But community property laws also affect estate planning. So, even if you and your spouse plan to be together until death parts you, it is still important to understand the impact those laws have on your estate.
What is Community Property?
In the United States, there are two primary ways that states deal with ownership of property by a married couple. Most states are “equitable distribution” states; both spouses are considered to have an interest in all property acquired by either of them during the marriage, and that property is divided equitably between them in a divorce.
In community property states like New Mexico, each spouse has a right to a one-half share of the property acquired by the “community” during the marriage. Property acquired before the marriage, and gifts or inheritances received by one party during the marriage, are generally considered that person’s separate property.
In a community property state, when one spouse dies, they have a right to leave their share of marital property as they wish; by law, the other half of the marital property must go to the surviving spouse. This has implications for estate planning, as do other aspects of community property law. Under some circumstances, spouses in community property states may want to have separate estate planning attorneys.
Estate Planning Issues in Community Property States
If you live in New Mexico or another community property state, there are things you should be aware of when making your estate plan. One is to be mindful of what is community property and what is not. Even if you and your spouse lived together as a committed couple for several years before your marriage, property acquired during that time is not generally considered marital property. If you want to leave your separate property to your spouse or anyone else, you should create an estate plan to that effect.
Also, while most property acquired during a marriage in New Mexico is generally considered marital (and therefore community) property, there are a few exceptions, such as an inheritance or a gift to one spouse. Again, if you want your spouse to inherit that property, or if you want to leave it to someone other than your spouse, your best move is to create an estate plan specifying your wishes. Some community property states allow spouses to add a “right of survivorship” to their community property. That means that when one spouse dies, the other spouse automatically receives the deceased spouse’s half of the community property. If you were planning on leaving everything to your spouse anyway, this option is a good way to avoid probate.
New Mexico does not have a right of survivorship for community property, but under certain circumstances, New Mexico residents are eligible for a process that simplifies the transfer of property from a deceased spouse to the surviving spouse. This streamlined procedure may avoid probate as well.
Moving Into or Out of a Community Property State
These days, it’s not uncommon for a couple to live in multiple states during their marriage. What happens if you move from a community property state to a state that has different laws, or vice versa? How will your property be classified? If you have moved into a community property state, assets you acquired during your marriage but prior to the move may be classified as quasi-community property and treated as community property, just as if you acquired it in a community property state.
If you have moved out of a community property state as a married couple, assets you acquire in the new state will not be considered community property. However, you may still have community property from your previous state of residence, so it is a good idea to let your estate planning attorney know that you lived in a community property state. She can advise you as to how that could affect the distribution of your assets.
Prenuptial Agreements, Community Property, and Inheritance
One way to take control of how your family members will inherit from you is to enter into a prenuptial agreement (or, if you are already married, a postnuptial agreement). People typically think of prenups in connection with divorce, but they can be an essential part of an estate plan, especially if you or your spouse have children from a prior marriage or relationship.
Using a prenuptial agreement, you can agree to opt out of community property property laws for purposes of your estate plan. You can also specify that certain property is to be designated as separate property to be inherited by each spouse’s children who are not children of the other spouse.
Placing community property in a trust can also offer a number of estate planning advantages, including tax benefits. To learn how to best achieve your estate planning goals in a community property state, contact The Law Offices of Dana M. Kyle to schedule a consultation.