To understand community property, and how the idea might affect a Tennessee estate plan, it is first important to understand the three main legal systems that influenced and were incorporated into American law as our nation grew into the country we know today.
The primary influence was, of course, English common law. This system built up over centuries of judicial decisions in England, and was the system with which the framers were most familiar and the backdrop against which this country's early legal system was created. However, with the Louisiana Purchase and further westward expansion, legal concepts from France and Spain carried over in the states that were formally possessions of those countries, such as Louisiana, Texas, and California. Community property is one such concept.
In most states, and under the common law, any property acquired solely by one spouse during a marriage is that spouse's separate property, meaning that they own it absolutely and the other spouse has no ownership interest. However, in community property states, all property acquired by either spouse during marriage, except by gift, inheritance, or a very few other exceptions, is the property of both ("the community").
Tennessee, in keeping with its history, is a common law state with regard to marital property. However, in 2010 the state enacted a statute allowing married couples to "opt-in" to community property by allowing the creation of a community property trust. Essentially, spouses can place assets into a trust and have those assets treated under the law as if they were community property. Therefore, Tennessee is one of 3 states (along with Alaska and South Dakota) that are often referred to as "opt-in" community property states.
The reason this might affect an estate plan is because community property is treated differently than separate property in the event of either divorce or probate. In Tennessee, a community property trust is a tool that a couple might be able to use to achieve certain tax benefits in the event that one spouse passes away, most notably a step-up in basis for the entirety of the community property estate and not just the decedent's separate portion. However, there are certain disadvantages to converting assets in this way, most notably that the spouses lose sole ownership, which can create problems if spouses later disagree about what should happen with the property.
The takeaways: Tennessee is a separate-property state, but which does recognize community property by allowing spouses to opt-in via a trust. This trust can, in certain situations, be a valuable estate planning tool because of differing tax implications for separate and community property. If you have questions about a community property trust, or any other kind of estate planning tool, be sure to contact a Tennessee estate planning attorney.
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