Estate planning in the Bay Area is more than merely planning for the disposition for your assets at death, it should also involve an overall tax plan. When we talk about tax, we are looking at the four types of taxes that primarily affect your estate plan: estate tax, gift tax, property tax, and income tax. While planning for your assets it’s important to know that all of your bases are covered, and having comfort in knowing that gifting an asset to your heirs will not result in such a negative tax consequence that it would negate the value of the gift all together. With that in mind, as part of creating the foundation of an estate plan, your estate plan should identify what is separate property and what is community property and plan for them accordingly.
Effect of Joint Tenancy
We often find that married couples hold their real property in joint tenancy. Doing so may have been strategic at the time the property was acquired, but when creating an estate plan, a married couple needs to consider whether transmuting the real property to community property is appropriate today. While holding real property in joint tenancy creates a right of survivorship in the surviving spouse, it does not provide for the beneficial tax treatment that a community property interest would receive. This becomes an income tax issue for the surviving spouse, because they do not get the full “step up” in basis on the property for income tax purposes. Under both Federal and California law, when a person receives property from the same one who passes away, the tax basis for real property is the fair market value of the property on the date of death. If the property is held in joint tenancy, the surviving joint tenant already owns one-half of the property and therefore only receives a “step-up” in basis on one-half of the property. The result is that, should the survivor wish to sell the property, they are left with hefty capital gains tax.
Benefit of Community Property
Holding your real property as community property with right of survivorship can provide you with several benefits that other vesting option do not allow. For example, similar to joint tenancy, there is a right of survivorship that would allow the survivor to acquire the decedents interest in the property automatically. What is distinct in this type of vesting though is the income tax benefit of getting the full “step up” in basis. This provides the survivor with option of selling the real property and minimizing capital gains tax when the sale occurs shortly after the death of the first spouse. Further, after the death of the second spouse, the property would get the step up in basis again, so that the heirs are provided with the same beneficial treatment of selling the property with minimal tax.
Outcome for the client
While many do not plan to sell their property, it allows the family several options. In many cases we see the family is forced to sell the property to pay for long-term care of the surviving spouse.
While in many cases, it can be beneficial to hold property as community property, every situation is different and needs to be evaluated by an experienced attorney. Hiring a skilled estate planning attorney can ensure that your estate plan is complete and that all of your assets, including your real property are properly titled. You should always seek the advice of a professional to ensure that it is done correctly, for your specific situation.