Changing the Way Couples Hold Title in California.
Beginning July 1, married couples can hold title to property as community property with right of survivorship The power of the successor or successors of a deceased individual to acquire the property of that individual upon his or her death; a distinguishing feature of Joint Tenancy. . The California Legislature enacted this law to allow married couples to transfer their community property to the survivor without the need for probate probate (prō`bāt), in law, the certification by a court that a will is valid. Probate, which is governed by various statutes in the several states of the United States, is required before the will can take effect. , while at the same time giving the surviving spouse a full step-up in basis Step-Up In Basis
The readjustment of the value of an appreciated asset for tax purposes upon inheritance. With a step-up in basis, the value of the asset is determined to be the higher market value of the asset at the time of inheritance, not the value at which the original party in the property.
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 A type of ownership of real or Personal Property by two or more persons in which each owns an undivided interest in the whole.
In estate law, joint tenancy is a special form of ownership by two or more persons of the same property. . 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 An arrangement created by a person depositing his or her own money in his or her own name in a bank account for the benefit of another.
A Totten trust is a tentative trust, revocable at will, until the depositor dies or completes the gift in his or her lifetime by some 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 California Law consists of 29 codes, covering various subject areas, the State Constitution and Statutes. See also
Under IRC (Internet Relay Chat) Computer conferencing on the Internet. There are hundreds of IRC channels on numerous subjects that are hosted on IRC servers around the world. After joining a channel, your messages are broadcast to everyone listening to that channel. 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 An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. 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 transmutation /trans·mu·ta·tion/ (trans?mu-ta´shun)
1. evolutionary change of one species into another.
2. the change of one chemical element into another. 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 Estate Planning
The overall planning of a person's wealth, including the preparation of a will and the planning of taxes after the individual's death.
Contrary to popular belief, estate planning involves much more than preparing a will, and it is not only for the topics, consult the estate planning forum at www.calcpaweb.org/webforum.
Rick Franceschini, Esq., CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , 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.