Changing the Way Couples Hold Title in California.
Under the new law, Civil Code Sec. 682.1, community property of a husband and wife, when expressly declared in the transfer document to be community property with right of survivorship, shall pass to the survivor without administration, subject to the same procedures as property held in joint tenancy. Prior to the death of either spouse, the right of survivorship may be terminated pursuant to the same procedures by which a joint tenancy may be severed.
This does not apply to a financial institution joint account to which Probate Code Division 5 Part 2--joint accounts, P.O.D. accounts and Totten trust accounts--applies. Specifically, Probate Code Sec. 5305 provides that if parties to an account are married to each other, their net contribution to the account is presumed to be and remain their community property. This presumption can be rebutted. However, there is generally no basis step-up issue with bank accounts since the basis is generally the balance on hand at time of death.
A LITTLE BACKGROUND
Current California law provides that, for the purpose of division of property upon dissolution of marriage, property acquired by the parties in joint form during marriage, including property held in joint tenancy is presumed to be community property (see California Family Code Sec. 2581). However, if either spouse dies before any jointly held community property is divided, the language of how the title is held in the deed will be controlling, and not the community property presumption (see Family Code Sec. 2040).
Under IRC Sec. 1014, upon a death of a spouse, the surviving spouse's half interest in community property, as well as the decedent's half, both get a stepped-up basis. If the property is treated as the separate property of each spouse, only the decedents' half of the property receives the stepped-up basis. If spouses hold property as joint tenants, the IRS has followed California law and on the death of the first spouse the property is owned 50 percent by each spouse as separate property.
Under Family Code Sec. 15500, the property rights of husband and wife prescribed by statute may be altered by a marital property agreement. If the spouses executed a property agreement that identified the joint tenancy property as community property, the IRS has allowed stepped-up basis on both halves of the property (see IRS Revenue Ruling 87-98).
If the spouses hold title to property as community property (without right of survivorship), the surviving spouse will have to go through probate to get title to the deceased spouse's 50 percent interest. Normally, this would require the surviving spouse to file a spousal property petition under California Probate Code Secs. 13500-13660. While a spousal property petition avoids the larger cost and delay of the administration of a full probate, it still results in an increased cost and delay to the surviving spouse.
Historically, spouses in California have been told that to avoid probate, they should hold their property in joint tenancy. However, in doing so, they potentially lost the ability to receive a full 100 percent step-up in basis in the asset on the death of the first spouse. Civil Code Sec. 682.1 was enacted to give the spouses the benefit of avoiding probate while receiving a full step up in basis on the first death.
Any clients who currently hold title to community property as joint tenants should consider re-titling their property pursuant to the new statute. Where the property is the separate property of one spouse, re-titling of the property pursuant to the new statute would cause a transmutation of the property into community property and the client should only consider this option if they want the transmutation to happen. Obviously, any clients purchasing a new property with community funds should title the property pursuant to the new statute.
There do not appear to be any disadvantages if a client titles the asset pursuant to the new statute. Hypothetically, there would be a disadvantage if you expect the property to be worth less on the first spouse's death than the cost value of the property.
For more information on this and other estate planning topics, consult the estate planning forum at www.calcpaweb.org/webforum.
Rick Franceschini, Esq., CPA, a partner with the San Rafael-based law firm of Rowland and Franceschini, is a member of CalCPA's Estate Planning Committee and a certified specialist in taxation law. He can be reached at firstname.lastname@example.org.