MARC  WEISSMAN

Estate Planner


 
FOSTER CITY
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COMMUNITY PROPERTY

This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal adviser.

In general, Community Property is everything earned during marriage from efforts performed during marriage.

Anything owned prior to marriage (and the proceeds and reinvestments of such property) is Separate Property. Gifts and inheritances received during marriage are also Separate Property.

For Divorce Court purposes, property is converted from separate to community by a husband and wife placing title in Joint Tenancy or Community Property. Mixing property (commingling) generally causes conversion into Community Property.

INCOME TAX CONSEQUENCES OF DEATH ON BASIS

Community Property has a major advantage after one spouse has died.

"Step Up in Basis"

The income tax valuation ("basis") of inherited assets is the value on the date of death.

For example, if Uncle George leaves you a share of stock in XYZ, and the stock was selling for $250 per share at the time of George's death, that share is treated if you had purchased it for $250 whenever you eventually sell the stock.

George's actual cost of the stock is totally disregarded for all future purposes. If value has decreased, a step down in basis occurs.

Joint Tenancy Property gets HALF a Step Up in Basis If you and George had purchased that share of stock together, when it cost $50, your cost basis for your share was $25, and George's cost basis for his was $25. George dies and leaves you his share. Only the portion inherited receives the step up in basis.

You now have your old with a cost basis of $25, and George's with a new basis of $125 (its value on the date of his death). Your total basis is $150. If you sell it right away for $250, your taxable profit is $100.

Community Property gets a "FULL Step Up in Basis" A special rule applies to Community Property. Regardless of which spouse dies first, the entire 100% of Community Property is revalued at the date of death of the first to die.

In our example, if you are married to George, and the stock is Community Property, the survivor's basis is $250 at the death of the first spouse, regardless of who first bought that stock.

For Step Up in Basis, Signed Document is Needed

For Divorce Court purposes, there are different rules to determine status of property. For tax purposes (i.e. step up in basis) property must be titled Community Property or another document signed by both spouses is needed. [For property owned from before 1984, an oral agreement between the spouses may be sufficient, but a written document is better proof.]

THERE IS A DOWN-SIDE TO CONVERTING ASSETS INTO COMMUNITY PROPERTY.

BENEFITS OF KEEPING PROPERTY SEPARATE

If property is separate (and Community Property can easily be made separate, by a written agreement of both spouses) there are two possible advantages.

Creditor Claims

Separate Property has an advantage since it is not subject to claims of all of the spouse's separate creditors. It is subject to claims for "community debts" (debts incurred for the family's general benefit, generally including business debts incurred during marriage), but not for pre-marriage debt or debt in connection with separate property (such as a tenant at his separate rental unit sues).

Divorce

If property is already owned in Joint Tenancy, conversion to Community Property has no ramifications if a future divorce occurs since each already owns half.

Declining Value Assets: Step Down in Basis

If George bought IBM at 105 and it is now at 60, if you inherit that stock you take with it the date of death fair market value as your basis. Thus you cannot write off that loss from George's original cost. [In fact, George should have sold the stock before he died so he could write off the loss.] If the property is owned as Separate Property, at George's death it gets half a step down in basis; if it is held as Community Property, it gets a full step down.

Better planning would be for George to sell that stock, take the loss, and buy it back (he must wait at least 30 days before buying it back to be able to write off the loss).

See:

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