Relocating? Your new state’s property rules may surprise you

As noted above, in the majority of states, the rules are fairly simple: Titling dictates ownership. As an example:

If a wife owns an asset in her own name, then she has the exclusive power to sell the asset, borrow against it, pledge it as collateral, and dispose of it under the terms of her will.

In the absence of a pre-nuptial or other marital agreement, or an ability to trace that asset to a gift or inheritance the wife received, her husband may have certain rights to that property—or at least to the value it represents—in a divorce or upon her death.

But the wife is the only person who can act in any way with respect to that asset (unless she has given someone power of attorney). 

By contrast, the titling of assets between spouses living in a community property state is basically irrelevant. (Again, there may be an exception if there is a superseding marital agreement, or if the property was gifted or inherited.) 

In these nine states—property laws apply only to married couples—each spouse can act with respect to all property owned by the “community” (of two); this includes selling or encumbering the property.

By extension, the marital community is generally responsible for debts incurred by either spouse, and creditors of either spouse can satisfy a valid claim from any community property. On the death of one spouse, one-half of the property is disposed of under the terms of the decedent’s will; the other half is the survivor’s property.

Some separate property states allow married residents to transfer property ownership to a community property trust, thereby giving couples the benefits—and burdens—of community property ownership.

Transferring property into a community property trust may affect the extent to which such property is eligible for basis step-up upon passing of the first spouse. The IRS has not ruled or commented on this issue. It’s a good idea to talk to a tax professional who can help you evaluate this based on your personal circumstances.

Married couples who move from community property states to separate property states—and vice versa—should speak with their professional advisors, including their J.P. Morgan team, to gain a full understanding of which assets are separately owned and which are community property.

To oversimplify: Once assets are community property, they generally stay as such, even if the couple moves to a separate property state—unless the couple takes affirmative steps to transmute the property into separate property.

For instance, property owned by a married couple moving from California to Wyoming would retain its character as community property no matter how long the couple lives in Wyoming—unless they document a transmutation, such as transfer of that property to new accounts.

Conversely, property owned by a married couple relocating from a separate property state to a community property state will, in time, acquire the status of quasi-community property (basically the same thing as community property)—unless, again, the couple affirmatively takes steps to have those assets treated as being held in some other way.

In all cases, a clear knowledge of how a married couple’s assets are owned is essential to the proper management of their wealth. We thus suggest that everyone—especially those who have ever relocated from one type of state to another—should check to make sure their expectations with respect to ownership are being met.