Unlike most jurisdictions, Arizona is a community property state. This means that unless a legal agreement is in place that says otherwise, each spouse owns an undivided one-half interest in all assets acquired during the marriage. It does not matter which spouse brought a specific property item into the household, both share ownership equally. While this concept is frequently discussed in the context of divorce proceedings, it also has a significant impact on estate planning. 

Many married couples move to Arizona after living for years or decades in another state. People who come from non-community property locations are particularly vulnerable to estate planning mistakes that occur because they don’t understand the applicable law. Some of the ways the state’s community property law might factor into your estate planning include the following:

• Restrictions on distribution — A decedent can dispose of only their half of community property plus all of their separate property (premarital assets, inheritances left solely to them and gifts not commingled with marital property). You cannot give away your spouse’s half in a will or trust, even if your name is the only one listed on the title or account. 

• Capital gains step-up — Homes and other types of property that rise significantly in value over time can trigger substantial capital gains taxes. However, when one spouse dies, the entire cost basis of a community property asset is adjusted to the current value. This is referred to as a step-up. If a couple bought a home for $300,000 20 years ago and it’s worth $900,000 when one spouse dies, a full step-up can eliminate the taxable capital gain of $600,000. Then, when the property is sold, the taxable capital gain would only be for the amount exceeding $900,000. 

• Prenuptial and postnuptial agreements — Given that the disposition of community property is restricted, individuals who wish to reserve assets for someone beside their spouse might want to negotiate a prenuptial or prenuptial agreement to that effect. Parents who have children from previous relationships sometimes choose to do this so that their sons and daughters can obtain a suitable inheritance. Business owners sometimes also draft a document keeping their company separate from community property. 

The Law Firm of Joseph M. Udall, PLC in Mesa advises clients on a full range of estate planning issues, including the best way to accomplish your goals under Arizona’s community property law. For a consultation, please call (480) 500-1866 or contact us online.