Finance Questions

Posts Tagged ‘stanley and iris’

How is Community Property Treated At Death?

For example, if a married couple, Stanley and Iris, buy securities as "joint tenants with rights of survivorship" for $400,000, the IRS considers that each paid $200,000 for a one-half interest. If Stanley later dies, Iris automatically owns the entire account, and Stanley's one half of all the securities in their portfolio are revalued as of the date of his death. If the account was worth $1,500,000 when Stanley died, then Iris is treated as if she paid $950,000 for the securities -- computed by adding her share of the purchase price ($200,000), to the value of Stanley's share when he died ($750,000).
In contrast, the IRS treats "community property" as if it were owned completely by the deceased spouse, in applying this special "adjusted basis" rule. (For other purposes, such as computing estate taxes, only one-half of the value of community property is counted.) Therefore, if Stanley and Iris bought their securities as "community property" for $400,000 and Stanley later died, leaving his share to Iris, the entire account would be assigned a new "basis" at current fair market value. Threrfore, Iris's basis in the securities becomes $1,500,000.
The result is that if Iris decides to sell the "joint tenancy" property for $1,500,000 shortly after Stanley's death, she would realize a taxable capital gain of $550,000 (the $1,500,000 sale price minus her $950,000 "adjusted basis," computed two paragraphs above). If the same account were held as "community property," however, she would recognize no capital gain, because her "adjusted basis" would be the same as the sale price. Therefore, where spouses hold highly appreciated assets, the community property form is more favorable for capital gain tax purposes.
It is possible in some Community Property States for the spouses to change their respective ownership rights in an asset, from community property to separate property and vice-versa, simply by executing a written agreement to that effect. For example, in California, a couple with a joint tenancy with rights of survivorship account may simply append a note to their wills explaining that their intention is for their possessions, no matter how registered, to be considered community property. By doing this, the surviving spouse receives a full step-up in basis after the first spouse's death, while also retaining the convenience of holding the property in joint tenancy.
Since accounts held as community property are subject to probate, it might be advisable to hold community property in a trust account or a Totten trust (payable/transfer on death accounts), to avoid the probate process. Community property with right of survivorship accounts are allowed in Arizona and California.