3995 / How does community property law affect the estate taxation of qualified plan benefits?

If an employee’s interest in the employer’s qualified plan is community property, then the interest is considered to be owned one-half by the employee and one-half by the employee’s spouse. Accordingly, if the employee were to predecease the spouse, only the employee’s community interest in any death benefit would be includable in the employee’s estate ( Q 3993). Likewise, if the employee’s spouse were to die first, only the employee’s spouse’s community interest in the plan would be includable in the gross estate.¹

The extent to which employee interests in qualified plans are community property is a matter of local law. There appears to be little doubt that an employee’s vested interest in a qualified plan, to the extent it is attributable to contributions made while the employee was married and living in a community property state, is community property.² Moreover, there appears to be increasing support for the view that nonvested benefits in a retirement plan are not mere expectancies but are property, and thus can be community property.³