Bar News - May 20, 2015
Opinion: Why NH Should Permit Married Couples to Choose Community Property
By: Calvin Massey
Only Alaska and Tennessee offer married couples the choice of holding their property as separate or community property. Nine other states mandate community property, but in those states, a couple can opt out of community property rules by agreement. Only in the remaining states are married couples forced to accept separate property. There is no good reason for this condition to exist.
There are several advantages to community property, but none are generally available now in New Hampshire. The most important advantage is the federal estate tax treatment of community property upon the death of a spouse. Community property also affords couples the effective benefits of a more generous spousal elective share and permits couples to create an equal economic partnership, without making specific title decisions each time property is acquired.
The principal tax advantage of community property occurs at the death of the first spouse to die. Under federal law, the tax basis of the entire community property is stepped up to market value on the date of death. The result is that the appreciation in value from acquisition to death is never taxed as a capital gain. Only appreciation following the first spousal death is subject to capital gains taxation.
Imagine a couple who started a closely held corporation in 1970, with a tax basis in the capital stock of $100,000, but which is now worth $2 million, when the first spouse dies. As community property, the tax basis of the stock is stepped up to $2 million. If the surviving spouse should later sell the business for $2.5 million, only $500,000 of gain is taxable. But if the stock is held in joint tenancy, only the decedentsí share is stepped up, so the spouseís new basis would be $1 million. Upon a later sale for $2.5 million, the taxable gain would be $1.5 million.
The same can be true of a house, real estate investments, or a securities portfolio. Separate property thus penalizes partners in a marriage who invest their savings when the survivor seeks to downsize the home or simply sell assets to live comfortably. Allowing married couples to reap the gains of their thrift without cost to New Hampshire (because New Hampshire has no estate or inheritance tax) would seem to be the very essence of good policy for a government dedicated to enhancing the welfare of its citizens.
New Hampshireís elective share statute provides the surviving spouse the ability to elect a forced share of the decedent spouseís estate, instead of taking under the decedentís will. The portion of the decedentís estate that the surviving spouse receives depends on the identity of other surviving kin, but is anywhere from one-third to one-half of the decedentís estate.
Under community property, the elective share is irrelevant. Each spouse may dispose of their separate property as they desire, but the decedent spouse may only dispose of his or her one-half interest in the community property. Because community property consists of the earnings of each spouse and any separate property that has been transmuted to the marital community, the economic fruits of most long marriages will be in the form of community property. Thus, a married coupleís decision to hold their property in community form guarantees that the surviving spouse will receive half of the pot. The decedent spouse can always provide for children or grandchildren by will governing his or her share of the community property.
When the value of the decedentís separate property greatly exceeds the community property, the elective share substitute of community property becomes much less than one-half of the decedentís estate. To deal with this, spouses could eschew community property, thus retaining the existing elective share.
Prior to marriage, spouses may contract, in consideration of their consent to hold property in community form, to provide by will that some specified portion of the separate property will be devised to the surviving spouse.
The current elective share statute could be modified to provide, where community property has been chosen, a new elective share in the separate property of the decedent spouse. While separate property states use the spousal elective share and equitable division statutes to remedy the inequality inherent in treating each spouseís property as separate, community property achieves the same or better results by creating a marital equal economic partnership without the necessity of making specific title decisions concerning assets acquired during marriage.
New Hampshire should not convert to community property, but in the interest of maximizing individual choice, one of the cardinal precepts of freedom, New Hampshire should permit married couples to choose the property regime they prefer. The cost of change is slight and the benefits are large.
Note: This article is adapted from a longer version that appears at 13 UNH Law Rev. 35 (2015).
Calvin Massey is the Daniel Webster Professor of Law at the UNH Law School, where he teaches property, will, trusts and estates, and constitutional law. He is a member of the California bar and various federal bars, including the US Supreme Court.