Dying without an estate plan: Comparing Tennessee and Texas intestacy laws

Two different systems govern how spouses own property in a marriage in the United States: the common law system and the community property system.

Whether your state follows a community property or common law system makes a huge difference in how assets are divided when you die without an estate plan.

What is a community property state?

Under the community property system, assets earned or bought during a marriage are considered community property and the assets of the marital unit. This system treats community property as belonging to both partners.

Community property generally includes income received from employment, property bought during the marriage and separate property that a spouse gives to the marriage. Separate property includes property acquired before the marriage, gifts and inheritance. The division of property may also be determined by a prenuptial or postnuptial agreement.

Even among community property states, there are some differences. For example, community property states have different ways of treating property acquired in a common law state.

For instance, California considers property community property if it would have been community property if acquired in California.

Is Texas a community property state?

Texas is a community property state and does not change the classification of property that was acquired while living in another state, unlike California.

Additionally, rules differ in how the income of separate property is treated. In some states, income earned from separate property during the marriage is community property. While in other states, it remains separate property.

In a community property state, how property is inherited when a spouse dies intestate depends heavily on whether it is characterized as community property or separate property. When a married individual dies, half of the community property automatically becomes the property of the surviving spouse. It is their half of the community property.

Community property gets a step-up in basis at the death of the first spouse to die. This could result in income tax savings when the surviving spouse sells the property.

There are nine community property states:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

A few states, including Alaska, allow married couples to opt-in to the community property system. This is called an elective community property state.

What is a common law state?

In a common law state, spouses are not automatically entitled to half of all the property acquired during the marriage. Instead, property ownership is determined by the name on the title of the property or by whose income was used to purchase it.

Property is owned by each spouse individually unless it is jointly titled. The majority of states are common law states.

When a person dies without an estate plan in a common law state, the only property that automatically transfers to a surviving spouse is the property owned in joint tenancy with rights of survivorship.

Most common law states have spousal inheritance rights. These laws give a surviving spouse the right to a claim of the decedent's estate, no matter what is written in the will. These laws protect a surviving spouse from being completely disinherited. Typically, the spousal share is one-third.

To better understand the different outcomes in community property versus common law states, consider the Stewart family. Peter and Mary Stewart got married in their late 40s. It was the second marriage for both, and they each brought children into the marriage from their previous relationships.

Peter had a 20-year-old son, Ralph, and Mary had two girls, Stephanie, 23, and Rose, 25. Tragically and unexpectedly, Steve died at age 61 without a valid will.

When he died, Peter and Mary jointly owned their family home. He also had $300,000 in probate property. Only $50,000 of the probate property was acquired during the marriage. He had no estate plan, and his estate was distributed according to his state's intestacy laws.

Read below to learn how his estate would be distributed if he lived in Tennessee as compared to Texas.

Tennessee intestacy laws

If the Stewarts lived in Tennessee (a common law state), there would be no differentiation between Peter's property acquired before and after marriage.

Under Tennessee's intestacy laws, if the decedent had children with their spouse or with another woman, the intestate estate is split evenly among the spouse and children. However, the spouse is entitled to at least one-third of the overall property in the estate.

In the case of the Stewarts, the home would be transferred to Mary outside of probate because she was a joint owner. The $300,000 would be divided equally between Mary and Ralph. Each party would receive $150,000 (half of the probate property). Mary's children would not be entitled to any share of Peter's estate.

Texas intestacy laws

If the Stewarts lived in Texas (a community property state), it would be critical to determine which property was community and which was separate. There is a presumption that all property acquired during the marriage is community property. Therefore, the $50,000 acquired during the marriage would be categorized as community property.

Under Texas intestacy laws, if you are survived by your spouse and children from outside the marriage, your one-half interest in the community estate will be inherited by your children.

Your surviving spouse will be entitled to their one-half interest. Therefore, $25,000 of the community property will go to Mary, and $25,000 will pass to Peter's son, Ralph.

The separate property includes property that was acquired before marriage. The $250,000 Peter entered the marriage with would be categorized as separate property. In Texas, if your spouse and children survive you, your spouse receives one-third of your separate personal property (as opposed to your separate real property).

Mary would inherit $83,333 of Peter's separate property, and Ralph would inherit the remaining $166,667. Mary also inherits the marital home because it is owned in joint tenancy.

As shown above, in Texas, Ralph receives a much larger share (and Mary a much smaller share) of Peter's estate. In Texas, Ralph would inherit $191,6667, and Mary would inherit $108,333.

In Tennessee, Ralph and Mary each inherit $150,000. In both states, Peter's stepchildren are disinherited, and the home passes outside of probate to Mary because she was a joint tenant.

Dying without an estate plan often leads to unexpected outcomes, especially in a blended family. Intestacy laws are a one-size-fits-all approach based on the traditional nuclear family.

The statutes are rigid, and the probate court will make no exceptions for special needs or known wishes. Sometimes the outcomes can be disastrous and vary significantly from what the decedent would have wanted.

Think again of the Stewart family discussed above. Because Peter had no estate plan, it is impossible to know how he would have wanted his property distributed. But it is highly probable that the application of his state's intestate succession laws led to an outcome that he did not expect and would not have wanted. For example, consider the four scenarios below.

Scenario No. 1

Suppose that Mary entered her marriage with Peter with considerable wealth and worked a high-powered job. Knowing that Mary would be sufficiently taken care of in retirement, it is likely that Peter would have wanted to leave the entirety, or at least a large majority, of his estate to his son from his first marriage.

Instead, a significant portion of his estate went to his second wife. Furthermore, when Mary dies, her assets (which includes everything she inherited from you) will pass to her two girls. None of her estate will be inherited by Ralph (unless he is included in her estate plan).

Scenario No. 2

On the other hand, perhaps Mary was a stay-at-home mom and entered her marriage with Peter with very little of her own property. She was relying on Peter for her retirement, and it was Peter's wish that he provide for his new wife for the rest of her life.

He did not think it was worth the money to create an estate plan because he assumed that everything would automatically go to his wife if he passed away. Instead, Mary was left in a vulnerable situation when she received much less than she expected, especially if they lived in Tennessee, where she was only entitled to a third of Peter's separate property.

Scenario No. 3

Despite not being their biological father, Peter considered Mary's children his own. Because he was married to Mary, he assumed that Stephanie and Rose would inherit part of his estate.

However, under intestate laws, stepchildren are not recognized unless they are legally adopted. It does matter if the deceased raised the children for their whole lives.

Scenario No. 4

Finally, perhaps Peter had a strong relationship with a charity. He told the organization and his wife that he wanted to leave his estate to the charity. However, despite his intentions, he never got around to creating an estate plan.

Under intestacy laws, nothing can be inherited by a charitable organization or friends, even if these wishes are known.