The list of property classifications in Utah is long and sometimes confusing: marital property, separate property, joint property, community property, probate property, non-probate property, intestate property, exempt property, joint tenancy, tenants in common. What precisely do these terms mean as it relates to a married couple’s property? In what context is each relevant? Utah estate planners should have a precise understanding of these various classifications so as to avoid unintended consequences.
Recently I met with a client, recently widowed, who expected to receive her late husband’s one-half interest in some real property in Hawaii. He and his brother had inherited this real estate at the time of their father’s death some 15 years earlier. Presumably without the help of a lawyer, the sons had prepared a deed and transferred the property from their father’s estate to themselves as joint tenants, not understanding the implications of survivorship rights that accompany joint tenancy. According to my client, no one had ever contemplated the possibility that the surviving brother would eventually accede to full ownership of the real estate. It is unlikely this was the father’s intent. Yet, windfall in hand, the surviving brother refused to give the new widow an interest in the property or any proceeds from the sale thereof. Because of the finality of the recorded deed, which tends to trump any other writing, the widow was left with virtually no remedies. Th e critical mistake, which was that the brothers did not take title as tenants in common, ended up costing my client nearly half a million dollars.
Similarly, careless classification of property between husband and wife in estate planning can lead to unwanted outcomes. For example, we are aware of a recent case in California where shortly after a wealthy man married, he used an online paralegal service to obtain a generic form of trust. The trust lacked a savings clause, which preserves the pre-contribution nature of property that is contributed to a joint trust. By virtue of contributing his separate property assets to a joint trust without a savings clause, he unwittingly commingled that separate property and thereby transmuted it to (California) community property. When his new wife divorced him two years later, she received half of his estate.
One Piece of Property; Multiple Classifications
The fact that the same property may have multiple valid classifications at the same time adds complexity to the analysis. Consider a home purchased in wife’s name using husband’s income. Depending on the context, the home might be classified simultaneously (and correctly) as wife’s separate property, the couple’s marital property, wife’s probate property, husband’s augmented estate property, wife’s intestate property, and both spouses’ exempt property. Whew!
Five Analytical Contexts
To make sense of the property classification puzzle of married persons, it helps to analyze property within five potentially relevant contexts: (1) divorce, (2) creditor attachment, (3) death, (4) income taxes, and (5) estate taxes. This article focuses on the first three.
- Divorce. In the context of divorce, Utah has two property classifications: (1) separate (also called premarital); and (2) marital. Assets owned by one spouse before marriage or acquired by her through gift or inheritance from a third party during marriage, are considered her separate (or premarital) property, provided she does not subsequently commingle them with marital property, and provided the other spouse does not build the assets’ value through his efforts or capital contributions. Assets acquired during marriage through the efforts of either or both spouses are generally considered marital property, whether titled on paper separately, in joint tenancy, in common, or otherwise. In a divorce, courts have the power to divide the aggregate marital property equitably; and, although a court’s powers may extend to separate property, courts rarely divide or reassign ownership of separate property. Burt v. Burt, 799 P.2d 1166 (Utah App. 1990); Dunn v. Dunn, 802 P.2d 1314 (Utah App. 1990).
- Creditor Attachment. In the context of creditor attachment, Utah courts generally respect the manner in which spouses title their property on paper, even if most is titled in one spouse’s name. (Utah Code Ann. §§ 30-2-3, 5 and 7) (all section references hereafter, are to Utah Code Ann.). This means husband’s creditors cannot attach assets titled in wife’s name even if those assets would constitute marital property. As to assets titled in joint tenancy or tenancy in common with wife, husband’s creditors may attach said assets, but only up to husband’s proportional interest (§§ 78B-5-512 and 78B-6-1218). There are some exceptions to this general rule (most notably, the fraudulent transfer doctrine) that are beyond the scope of this article.
- Death. Death presents a more complex maze of property characterizations, depending on the scenario.
Separate vs. Joint vs. Community Property (in Trusts)
We have seen forms of trusts in Utah that create confusion because (1) they use the terms joint, marital and community almost interchangeably and without clearly defining them, and (2) they do not clarify that such characterizations of the property within the trust may not hold up in contexts outside the trust, such as divorce. Moreover, in the A-B trust context, some trusts use the term marital trust that should be funded by various types of property with fuzzy definitions.
Separate property in a Utah trust includes any asset titled in only one spouse’s name contributed to the trust (e.g., an individually titled bank account); and joint property includes assets titled in the couple’s names jointly, with right of survivorship, contributed to the trust (e.g., a jointly titled bank account, or a home owned in joint tenancy). In an easy-to-miss act of transmutation, many trusts immediately divide joint property into two equal tenancy-in-common (TIC) shares, one for each spouse, with no right of survivorship. Each spouse’s TIC share is deemed thereafter his or her separate trust property. Thus, a spouse’s separate property in a joint trust actually consists of her separately titled property funded to the trust plus her one-half TIC share of jointly titled property funded to the trust. This transmutation allows for A-B planning in Utah joint trusts.
References to community property in Utah trusts can be perplexing at first blush because Utah is a separate property (also known as a common law property) state. However, Utah recognizes the community property status of assets previously acquired while a married couple lived in a community property state (§ 75-2b-102). This can provide the significant advantage of the “double step up” in basis for income tax purposes.
Probate vs. Non-probate vs. Intestate (per Utah Code)
The Utah Uniform Probate Code (UUPC) classifies all property as probate or nonprobate. Probate property is any asset that does not automatically pass to a successor owner at death pursuant to the asset’s own title instrument or operation of law. (§ 75- 2-201 (7)). A land parcel titled in fee simple in a single person’s name is probate property because it does not automatically pass to a new owner at death. The purpose of a will is to provide for the succession of probate property. Where there is no will, probate property is considered a person’s intestate estate and is distributed pursuant to the UUPC default intestacy scheme. (§§ 75-2-101, 102, 103 and 201(7)).
Nonprobate property is any asset that automatically passes to a successor owner at death pursuant to the asset’s title instrument or operation of law. (§§ 75-2- 201(1), 205 and 206) Joint bank accounts, retirement accounts naming survivor beneficiaries, real property held in joint tenancy, and property funded to a trust are examples of nonprobate property.
Separate vs. Augmented vs. Community (per Utah Code)
The UUPC also classifies all property of a married couple as separate, augmented or community. Separate property in the UUPC is roughly equivalent to separate property in the context of divorce (i.e., owned by one spouse before marriage or acquired by her during marriage through gift or inheritance and not commingled with the augmented estate). (§75-2-208 (1) through (4)). The augmented estate in the UUPC is the rough equivalent of marital property in the context of divorce (i.e., acquired through the efforts of either or both spouses during marriage, regardless of how titled). Unlike divorce, however, which provides for equitable (usually equal) division of marital property, the UUPC provides that a surviving spouse may claim only the greater of $75,000 or one third of the augmented estate, known as the elective share, when the couple’s asset titling and testamentary planning would otherwise leave the surviving spouse with less than that. (§§ 75-2-202 and 203).
The UUPC also recognizes the community property characterization of assets acquired by a married couple while living in community property states, provided the couple preserves the characterization after moving to Utah. Community property is divided equally at the first spouse’s death regardless of how assets are titled. The deceased spouse’s estate keeps one share; the surviving spouse the other. Community property is expressly separate from the augmented estate and is not to be used in calculating the elective share. (§§ 75-2b-101 et seq.).
Hopefully this article has shown the importance of understanding property classifications for married couples in Utah. Planning with a firm grasp of these nuances in mind can produce more predictable outcomes for your estate planning clients.