Community Property vs. Common Law: How Marital Property Affects Probate

Two Legal Systems, One National Estate Practice

The United States runs on two fundamentally different systems of marital property ownership, and the system that applied to a decedent's marriage shapes what the estate actually contains, who inherits it, and what tax treatment applies at death. Under IRC §1014(b)(6), community property gets a full double step-up at the first death — a marriage that owned $1M of stock with a $200K basis sees the entire $800K of gain disappear.

In a common-law state, the surviving spouse keeps their original basis on half. That's the single biggest planning difference between the two systems.

The 9 community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin (which adopted the system through its Marital Property Act in 1986). Every other state, plus DC, follows the common-law (separate property) system. The choice affects inheritance outcomes, estate and income tax planning, divorce settlements, and Medicaid eligibility — a foundational concept for any advisor working with married clients.

This article provides a practical comparative analysis of the two systems as they affect probate administration, including the treatment of quasi-community property, the rules for characterizing assets as community or separate, commingling and tracing, and the significant step-up in basis advantage that community property offers. For related discussions of spousal rights in non-community property states, see our guide to spousal elective share rights. For the tax planning overlay, see our multi-state estate tax planning guide.

The Community Property System: Fundamental Principles

Under the community property system, most property acquired during marriage is owned equally (50-50) by both spouses, regardless of which spouse earned the money, purchased the asset, or holds title. The foundational principle is that marriage is an economic partnership: each spouse contributes equally to the acquisition of marital wealth, whether through paid employment, homemaking, or investment management. Generally, neither spouse can unilaterally dispose of community property without the other’s consent, though management rules vary by state.

Community property includes: wages and salaries earned during marriage; property purchased with community funds; business income generated during marriage; and investment returns on community property assets. Separate property—which each spouse owns individually and can dispose of freely—includes: property owned before marriage; property received as a gift or inheritance during marriage (even during the marriage, a gift to one spouse is that spouse's separate property); and the income from separate property in some states (notably California) while others (notably Texas) treat it as community income.

Cornell Law School's Legal Information Institute provides accessible summaries of community property law principles and the relevant state statutes. IRS Publication 555 addresses community property rules for federal tax purposes—an essential reference for estate tax planning in community property states.

Characterization: Separate vs. Community in Practice

In theory, the distinction between separate and community property is clear. In practice, characterization disputes are among the most contentious issues in both divorce and probate proceedings. Assets rarely remain in the same form throughout a long marriage; they are sold, reinvested, combined with other assets, used to purchase other assets, and transformed through transactions that may or may not leave a clear paper trail.

Transmutation—the conversion of separate property to community property (or vice versa) through the parties' agreement—is recognized in all community property states but must meet specific formality requirements. In California, transmutation generally requires a written agreement signed by the spouse whose interest is adversely affected. In Texas, a written partition and exchange agreement is the standard mechanism. Oral transmutations are generally not recognized in modern community property states.

The burden of proof for characterization claims matters significantly in probate. In most community property states, there is a presumption that property acquired during marriage is community property.

A party claiming that an asset is separate property bears the burden of establishing that character through tracing—following the source of funds back to a separate property origin. The tracing burden becomes increasingly difficult as the years pass and financial records become less available. Personal representatives administering community property estates should work closely with the surviving spouse and a forensic accountant when characterization is in dispute.

Commingling: The Greatest Threat to Separate Property Character

Commingling—the mixing of separate and community funds in a single account or investment—is the most common way that separate property loses its character and becomes community property or, at minimum, subject to a community property claim. When a spouse deposits an inheritance (separate property) into a joint checking account where both spouses' earnings (community property) are also deposited, and then withdrawals are made for community expenses, the separate property origin of the inherited funds may be impossible to trace.

The exhaustion method and the direct tracing method are the two principal approaches courts use to determine whether separate property can be identified in a commingled account. Under direct tracing, the claimant must identify specific separate property deposits and show that sufficient funds remained in the account throughout the period to cover the separate property interest. Under the exhaustion method, the court determines whether the community funds in the account were exhausted (by community withdrawals) at any point; if so, any remaining balance must be community property, since the separate funds were the last to be withdrawn.

The practical lesson for estate planning attorneys is straightforward: clients should maintain separate accounts for separate property assets and avoid depositing separate property into joint accounts. This advice, if followed, eliminates most characterization disputes entirely. For clients who have already commingled, a prenuptial or postnuptial agreement that specifically acknowledges the character of particular assets can provide clarity that pure tracing cannot.

Quasi-Community Property: The Multi-State Problem

Quasi-community property addresses a specific problem: a married couple who lived in a common-law state during their working years and then moved to a community property state before retirement. Under strict application of the community property system, all property acquired in the common-law state would be separate property of whichever spouse earned it or holds title—even if the property would have been community property had it been acquired in the community property state.

California and a few other states have addressed this inequity by treating as quasi-community property any asset acquired while domiciled outside the state that would have been community property if acquired in California. At death (and in divorce), quasi-community property is treated as if it were community property for purposes of distribution. The deceased spouse's half is subject to testamentary disposition; the surviving spouse retains the other half as their own property, just as with true community property.

The quasi-community property doctrine does not apply at death in all community property states—Texas, for example, does not recognize quasi-community property. Attorneys administering estates of clients who have lived in multiple states must carefully analyze which state's law applies to each asset and whether the quasi-community property doctrine affects the surviving spouse's rights.

The Step-Up in Basis Advantage of Community Property

One of the most significant tax advantages of community property arises at death through IRC §1014. Under §1014(b)(6), when a spouse dies in a community property state, both halves of the community property receive a step-up in basis to fair market value as of the date of death—not just the deceased spouse's half. In a common-law state, only the deceased spouse's separately owned assets receive the step-up; the surviving spouse's assets retain their original cost basis.

The practical significance of this difference is substantial. Consider a married couple in California who own stock with a cost basis of $200,000 and a current value of $1,000,000.

If the husband dies, both the husband's $500,000 half-share and the wife's $500,000 half-share receive a step-up in basis to $500,000. The wife can immediately sell the entire $1,000,000 position with no capital gains tax.

In a common-law state, the wife's $500,000 share retains its original basis of $100,000 (half of the $200,000 total basis). If she sells immediately, she owes capital gains tax on $400,000 of gain.

This step-up advantage has significant implications for planning in community property states. Assets with large embedded capital gains are particularly valuable to hold as community property rather than as the separate property of one spouse.

When you draft trusts and ownership structures for community-property-state clients, consider the basis implications alongside income, estate, and Medicaid planning goals. The interaction of characterization, the step-up in basis, and the estate tax marital deduction creates planning opportunities that demand tight coordination between estate attorneys and tax advisors. Our California Probate Calculator and Texas Probate Calculator reflect the community property rules in those states — including county-specific data for Los Angeles County and Harris County.