On March 16, 2012, Governor Herbert signed into law Senate Bill 168. Sen. Lyle Hillyard was the Chief Sponsor of the bill, and Rep. Lowry Snow sponsored the bill in the House. The bill will appear as Chapter 2b in Title 75 of the Utah Code.
With small modifications, the bill tracks the language of the Uniform Disposition of Community Property Rights at Death Act, which has been promulgated by the National Conference of Commissioners on Uniform State Laws. The Uniform Act is designed for common law states, like Utah.
Senate Bill 168 preserves community property rights that were acquired by spouses in a community property state before they moved to Utah. It does so only for purposes of disposition of property at death. It does not affect rights upon divorce.
In our geographically mobile society, it is common for estate planning clients to live many years in one state and to die while domiciled in another state. In particular, it is common for clients to move to Utah (a common law state) after having lived for many years in a western community property state, such as California, Nevada, Arizona, Idaho, Washington or Texas.
Prior to the enactment of SB 168, it was not clear under Utah law how property was to be treated when a spouse died domiciled in Utah owning property that was acquired as community property when the couple was domiciled in a community property state.
The dilemma is illustrated by the following example: Suppose a husband and wife living in California held a bank account or brokerage account that consisted of community property funds. The couple then moved to Utah. Upon the death of the wife, the account was titled in the name of the husband. What portion of the account could the wife dispose of as part of her estate? In Utah, the ability to dispose of property at death follows title. Under that approach, none of the account would be included in the wife’s estate because it was titled in the husband’s name. But in a community property state, the wife would be able to dispose of one-half of the account as part of her estate. Which rule should apply when she died a resident of Utah?
Prior to the enactment of SB 168, many practitioners in Utah believed that community property acquired in another state was to be respected as community property in Utah for purposes of disposition at death. Indeed, to deny a spouse the ability to dispose of one-half of the property that was acquired as community property in another state may be a violation of that spouse’s property rights under the U.S. Constitution. But there was no Utah statutory or case authority that set forth what the law really was. SB 168 was not designed, therefore, to change the law. Rather, it was designed to clarify what many believed the law already was.
SB 168 (now Title 75, Chapter 2b of the Utah Code) makes it clear that property acquired as community property, as well as the proceeds of that property, will be treated as community property when one of the spouses dies domiciled in Utah for purposes of determining what property that spouse has the ability to dispose of as part of his or her estate.
Under SB 168 (using our prior example), if a husband and wife living in California hold a bank account or brokerage account that consists of community property funds, and the couple then moves to Utah, upon the death of one spouse, that spouse has the ability to dispose of one-half of the account as part of his or her estate, whether by will or revocable trust. Similarly, if the spouse dies intestate, one-half of the account will pass as part of the deceased spouse’s estate under the rules governing intestate succession. The other one-half of the account belongs to the surviving spouse.
The last sentence of §75-2b-104 makes it clear that the community property is not to be taken into account when calculating the surviving spouse’s elective share in Utah. Elective share statutes are designed to give the surviving spouse a measure of protection in cases where substantially all of the couple’s assets were held in the name of the deceased spouse, and that spouse left the property to someone other than the surviving spouse. Community property states do not have elective share statutes because the 50/50 ownership of the community property gives the surviving spouse the needed protection. Thus, property that is treated as community property by Utah is properly excluded from the elective share calculation.
Under I.R.C. §1014(b)(6), when one spouse dies, all of the couple’s community property (i.e. both halves of the community property) receives a step-up in income tax basis to its fair market value at the time of death. This rule clearly applies to a couple living in a community property state. Because the tax code defers to state law with regard to the ownership of property rights, §1014(b)(6) probably also applies to a couple living in a common law state, like Utah, that has enacted the Uniform Disposition of Community Property Rights at Death Act. (See I.R.S. Field Service Advisory 1993 WL 1609164; Rev. Rul. 87-98.) One important implication of this for Utah practitioners is that, as a result of the enactment of SB168, it may be more important than ever to counsel clients to keep clear records of what property constitutes community property and what property constitutes separate property, and to avoid the commingling of assets.
To learn more about utah estate planning, go to The Utah Trust & Estate Educational Resource Center.
Rust Tippett is the author of this blog post.
Copyright 2012 UNLEPI, LLC, a Utah limited liability company. All Rights Reserved.
This blog post in no way creates an attorney-client relationship between the reader and either Robert S. (Rust) Tippett or Bennett Tueller Johnson & Deere, P.C. The reader should consult with his or her own estate planning attorney regarding his or her particular circumstances.
