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9 Real Prop. Prob. & Tr. J. 736
Real Property, Probate and Trust Journal
Fall, 1984
*736 THE UNLIMITED MARITAL DEDUCTION AND THE DIFFERENCES REMAINING IN
TREATMENT OF RESIDENTS OF COMMUNITY PROPERTY AND COMMON LAW STATES AT DEATH
Richard S. Arnold [FNa] and Peter S. Cremer [FN]
Copyright 1984 by the American Bar Association; Richard S. Arnold and Peter
S. Cremer
EDITOR'S SYNOPSIS: This article discusses the advantages under the tax law
of community property over separate property. These are primarily the
ability to spread the planning over two estates even when the spouse who
acquired all the property dies first, and the availability of a stepped-up
basis for all the community property on the death of the first spouse.
FOREWORD
The following report by two members of the bar of a community property
state-California-explores the differences that remain, after the enactment
of an unlimited marital deduction, between community property systems and
common law systems in the United States. It is our impression that often
lawyers in common law states do not pay close attention to the community
property systems of their sister states. Especially in today's environment,
where many of our clients move into and out of community property states, it
is helpful, if not essential, to have a working knowledge of community
property systems. There are currently eight community property states:
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and
Washington. Wisconsin has adopted a version of the Uniform Marital Property
Act which will essentially convert its common law system into a community
property system beginning in 1986. (See 1983 Wisconsin Assembly Bill No.
200. The Wisconsin State Legislative Bureau has prepared a commentary on the
new community property law which, we understand, is available from Wisconsin
Legislative Bureau Reference B, 201 North, State Capitol, Madison, WI 53702;
its title is Marital Property Act: a Compilation of Materials, Information,
Bulletin 84-IB-1.) It is our understanding that Colorado, Illinois and Utah
may also adopt versions of the Uniform Marital Property Act.
JONATHAN G. BLATTMACHR KATHLEEN FORD BAY
Chairman Vice-Chairman
Estate Planning and Drafting Subcommittee: Marital Deduction
*737 I. INTRODUCTION
Among the major changes which the Economic Recovery Tax Act of 1981 (ERTA)
[FN1] made to the Internal Revenue Code of 1954 (Code) was the institution
of an unlimited gift and estate tax marital deduction. [FN2] This new
unlimited marital deduction was made equally applicable to community
property and separate property, and on first impression would appear to
eliminate the prior distinctions in the tax treatment of decedents and their
spouses who reside in community property states as compared to the tax
treatment of residents of common law states. However, several such
distinctions still remain. This report will delineate those differences in
treatment.
A. The Concept of Community Property
The community property system, which essentially arose from the civil law of
Spain (or in the case of one state, from the civil law of France), is
currently part of the law of eight states: Arizona, California, Idaho,
Louisiana, Nevada, New Mexico, Texas and Washington. [FN3] (Wisconsin will
join this list in 1986.)
Community property interests arise only between husband and wife. Community
property can generally be defined as all property acquired by either the
husband or the wife during their marriage except for property acquired
during that time by gift, bequest, devise or descent. [FN4] Thus, all
property owned by a spouse before the marriage, or acquired during the
marriage by gift, bequest, devise or descent, is that spouse's separate
property. [FN5] The proceeds and income from community property are
themselves*738 community property. [FN6] Some states, e.g., Idaho and Texas,
[FN7] treat income from separate property as community, unless there is an
agreement to the contrary; other states, e.g., California, [FN8] classify
income from separate property as separate.
Generally, today, both husband and wife have a presently vested, equal,
undivided interest in all community property. [FN9] Historically, the
husband had the power of management and control over nearly all of the
community property; today, the trend is towards vesting equal management and
control in both husband and wife. [FN10]
B. Community Property and the Marital Deduction
The marital deduction was initially designed to accord roughly equal
transfer [FN11] tax treatment to estates containing community property and
those containing separate property. Since the surviving spouse owns one-half
of the community property outright, the deceased spouse's gross estate
includes only the decedent's one-half of the community property. The
surviving spouse owns his or her one-half of the community property free of
transfer tax, and only the decedent's one-half interest in the community
property is subject to transfer tax. Allowing a marital deduction up to a
maximum of one-half of the value of the decedent's noncommunity property for
transfers to a surviving spouse [FN12] accorded the surviving spouse in a
common law state (or a surviving spouse of a decedent owning separate
property in a community property state) the same transfer tax treatment as
the surviving spouse in a community property state. As long as the marital
deduction was designed only to achieve parity between common law and
community property states, no marital deduction was allowed for an estate
consisting solely of community property.
The Tax Reform Act of 1976 engrafted a second concept onto the marital
deduction: for decedents dying after December 31, 1976, a marital deduction
was allowed up to $250,000, even if this amount exceeded one-half of the
decedent's adjusted gross estate. [FN13] To maintain parity between*739
community property and common law states, this minimum marital deduction
was allowed to a limited extent for community property as well as separate
property. In the case of community property, the surviving spouse's one-half
of the community property was subtracted from $250,000, and the balance was
allowed, with certain adjustments, [FN14] as a marital deduction. This
allowed the surviving spouse to wind up with at least $250,000 free of
transfer tax, whether or not a community property jurisdiction was involved.
ERTA has expanded this second concept to allow, free of transfer tax,
unlimited interspousal transfers. [FN15] Again, community property and
common law states have had their parity maintained, by removing any
distinction between community property and separate property for purposes of
computing the allowable marital deduction. Since a zero tax can now be
achieved in a separate property state where there is a surviving spouse, an
extra tax levied on community property would be created if the old rule were
retained. Thus, under new section 2056, no distinction is made between
community and separate property for purposes of the unlimited marital
deduction.
C. Remaining Differences
The old marital deduction never achieved true tax equality between community
and common law states. For example, in a common law state, if a spouse who
owned little or no separate property (the nonacquiring spouse) died first,
he or she would have had
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