Community Property
Estate planningGlossary term
Definition
A form of marital property ownership recognized in certain states where most assets and debts acquired during the marriage are considered equally owned by both spouses, regardless of who earned the income or whose name is on the title. In community property states, each spouse automatically owns a 50% interest in marital property. This has significant implications for estate planning, divorce, and taxes, particularly regarding the stepped-up cost basis at death.
Related terms
- Joint TenancyA form of property ownership in which two or more people hold equal shares of an asset with the right of survivorship, meaning that when one owner dies, their share automatically passes to the surviving owner(s). Joint tenancy avoids probate for the jointly held asset, making it a simple estate planning tool for married couples and family members. However, it can create unintended consequences for estate planning, taxes, and asset protection if not carefully considered.
- Tenancy in CommonA form of property ownership in which two or more people each own a distinct share of an asset that does not have to be equal and does not include a right of survivorship. When a tenant in common dies, their share passes through their will or, if there is no will, through intestate succession rather than automatically transferring to the other owners. This type of ownership is often preferred when co-owners want to pass their share to their own heirs rather than the other co-owners.
- Estate TaxA federal or state tax imposed on the transfer of a deceased person's assets to their heirs, calculated based on the total value of the estate above a certain exemption threshold. As of recent years, the federal estate tax exemption is quite high, meaning most estates do not owe federal estate tax, though some states impose their own estate taxes with lower thresholds. Proper estate planning using trusts and other strategies can help reduce or eliminate estate tax liability.
- Marital DeductionA provision in federal estate and gift tax law that allows an unlimited amount of assets to be transferred between spouses without incurring estate or gift taxes. The marital deduction effectively defers estate taxation until the death of the surviving spouse, at which point the combined estate may be subject to tax. Proper estate planning often combines the marital deduction with trusts like bypass trusts and QTIP trusts to maximize the total amount shielded from estate taxes.
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