miller nash llp | Winter 2014 brought to you by the trusts & estates practice team Estate Planning Advisor Fundamentals of Community Property A. Rights Affected by Character- Community property includes all ization as “Community” or income earned during the marriage by “Separate” either party, and all assets purchased by Adrienne P. Jeffrey with such earned income. In Washing- Although calling property “com- adrienne.jeffrey@millernash.com ton, there is a general presumption that 206.777.7512 munity” or “separate” may seem like a all property is community property, matter of semantics, characterization I. Introduction to Community Property unless specific evidence indicates that actually carries great weight in deter- a given piece of property is not commu- Washington, Idaho, California, mining ownership and the rights of the nity property. Finally, all income earned Nevada, Arizona, New Mexico, Texas, parties. on community assets is community Louisiana, and Wisconsin are all “com- When a marriage dissolves, each property. munity-property” states. This means spouse will be entitled to half the com- that in each of these states, items of a Separate property includes property munity property. During a marriage, married couple’s property are character- owned by one spouse before marriage, community property cannot be sold ized as either community or separate, gifts and inheritances (even if they are or given away by one spouse without and each spouse’s right to any given received by a spouse during marriage), the consent of the other spouse. Upon piece of property is determined based death, a spouse may give all of his or her (continued on page 7) on the property’s characterization—not separate property as he or she wishes, necessarily by title. The general concept but may give only his or her half of the of community property is similar in community property. inside this issue each of these states, but the application Characterization of property also of community-property laws varies by 2 Should We Care About significantly affects the rights of credi- Making Annual Exclusion jurisdiction. This article will discuss Gifts? tors. A discussion of creditors’ rights the fundamentals of community-prop- in community and separate property 3 Who Will Make Decisions erty laws in Washington State: what for You? An Essential Part of is beyond the scope of this article; if constitutes community and separate Your Plan you have a question on this point, you property and what it means if an asset 4 Getting Started in the Exit should contact an attorney. is community or separate. Planning Process B. What Is “Community Prop- How to keep separate property 5 Preparing for the Onset of erty” and “Separate Property”? separate, and how to convert separate Dementia property into community property, will In Washington, a couple may agree be discussed in the next issue of the to characterize their property as com- Estate Planning Advisor newsletter. munity or separate in any manner they desire; this discussion will explain how Washington law classifies property when the parties have not agreed oth- erwise. www.millernash.com
Should We Care About Making Annual Exclusion Gifts? $84,000 (two parents × three children × lion, respectively. There is no Oregon or $14,000). This is certainly a substantial Washington gift tax, so unlimited gifts amount of money. But compared to the can be made without triggering an Or- by Ronald A. Shellan estate tax exemption of $10,680,000 egon or Washington gift tax. For those ronald.shellan@millernash.com ($5,340,000 each for husband and who have an Oregon estate in excess 503.205.2541 wife), it is only .079 percent of the total of $1 million, but less than the federal exemption. If a $10.68 million estate $5.34 million exemption, any gift will Under federal law, a person can is composed of real estate, stocks, and reduce the Oregon estate taxes at death. make a gift or gifts to anyone without bonds, it is likely over the long run to be The sole advantage of making a smaller having to file a gift tax return if the growing at a compound annual rate of gift within the $14,000 annual exclu- total calendar-year amount of the gifts perhaps 7 or 8 percent. Thus the prob- sion, however, is simply to avoid filing to that person is under $14,000. But lem with making a smaller gift is that it a gift tax return. In fact, many clients do such gifts really matter anymore does not do much to reduce estate taxes stick to gifts using the $14,000 annual now that the estate tax exemption is exclusion amount, since it is a num- $5,340,000? ber that they can grab onto. But it The gift tax exemption as de- is generally too small a gift to save signed generally applies to gifts to an appreciable amount of federal or children. When a person pays for state estate taxes. the child’s support and education If a couple did have a larger es- while a minor, such payments are tate, one that was over $10.68 mil- not treated as taxable gifts under lion, the savings in federal and federal law. A gift of a sweater or state estate taxes from making an cash for Christmas or a birthday, annual exclusion gift of $14,000 for example, is normally treated will often be equal to 50 percent or as a gift. If valued under $14,000, more of the amount of the gift. The such gifts are exempt from the difficulty is that it will generally obligation to file a gift tax return. take a much larger gift, or utilizing Thus, an annual exclusion gift other estate planning techniques, can definitely be a plus because it to significantly reduce the overall avoids the cost and hassle of filing estate tax bite. a gift tax return. Another plus of annual exclu- sion gifts is that they do not use up any part of the estate tax exemption of for those who have larger estates. Such $5.34 million. Thus, if a gift were made an estate will continue to grow far faster in 2014 for $14,000, the estate tax ex- than it can ever be reduced by annual emption of $5.34 million would remain. exclusion gifts. But a larger gift of, say, $18,000 would Most of us will never see our estate consume $4,000 of the estate tax ex- exceed $5.34 million (adjusted for infla- emption, reducing it to $5.336 million. tion), and thus there is no need to worry In the past, parents would often about federal estate taxes. In Oregon attempt to leverage the amount of an- and Washington, the state estate tax nual exclusion gifts to their children. exemptions are at $1 million and $2 mil- So if a husband and wife had three children, they could each gift to each child $14,000, for a total gift, all sub- ject to the annual gift tax exclusion, of 2 | miller nash llp | Estate Planning Advisor
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