How community property ownership affects your real property
As a team, we are interested in continuing education for our team members. For one of our recent training sessions, we invited Rachael M. Harbison, Attorney at Hurley Re, P.C. to speak with us about the importance of meeting with an estate planner to make sure property ownership is properly designated in a will. We thought our readers might benefit from some of the information as well, so we asked Rachael to write an article we could post.
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Central Oregon, known for its beauty and vast recreational opportunities, has seen significant population growth in the past several years. Many of the families moving to this area come from the neighboring states of California, Idaho, Washington, or Nevada. These states share one thing in common: they all designate marital property as community property. Oregon, on the other hand, is a common-law property state. Preserving community property after moving to Oregon may provide significant tax advantages for spouses. Therefore, it may be advantageous for families moving to this area to consult with an estate planning attorney prior to purchasing property to discuss maintaining their community property status.
What is community property? When a married couple resides in a community property state, any asset acquired during their marriage is considered community property and owned equally by both spouses unless they have signed an agreement providing otherwise. This equal ownership occurs even if the property is solely titled in one spouse’s name.
What happens when a couple moves from a community property state to Oregon? Property does not automatically lose its community property status upon moving to a common-law property state. However, it is relatively easy for a couple to mistakenly lose a community property designation. For instance, acquiring real property in Oregon as tenants-by-the-entirety or as tenants-in-common with the right of survivorship could have the effect of terminating the community property status and converting the property to common-law property.
What are the benefits of maintaining community property? A potential tax advantage of conserving community property includes receiving a full step up in basis at the death of the surviving spouse. At the death of the first spouse, the surviving spouse’s ½ share would receive a new basis in addition to the decedent spouse’s ½ share. IRC 1014(b)(6). For common-law property, only the deceased spouse’s portion of the property would receive a step-up in basis.
A community property status may also be beneficial for blended families. Some spouses may wish to devise his or her ½ interest to their children from a previous marriage, and if the property were community property they would be free do so. However, if the property was owned with the right of survivorship, the property would pass to the surviving spouse in its entirety. This may not be the family’s desired outcome.
Couples have options when deciding whether or not to preserve their community property status. Commonly, a couple may place their community property into a joint revocable trust. Couples may also enter into a community property agreement, essentially a contract that designates specific assets as community property. It is important to review each family’s situation on a case-by-case basis, as the designation of property depends on several factors. But first being aware of your options is the key to good planning.