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Q: California Community Property Law and inheritance ( Answered 5 out of 5 stars,   3 Comments )
Question  
Subject: California Community Property Law and inheritance
Category: Miscellaneous
Asked by: myoarin-ga
List Price: $100.00
Posted: 26 Sep 2005 03:55 PDT
Expires: 26 Oct 2005 03:55 PDT
Question ID: 572678
I have not been a resident of California for 40 years, nor a resident
in another state, albeit still a US citizen.  In past years, I was
given real estate in California and inherited stocks, now in an
account with a broker in California.
I understand from the answer to another question, that this all plus
income remains my personal property.  My wife has never been a
resident in USA.

If I include her in ownership of the real estate by imputation (?
right word) or simply by adding her name to the stock account, making
it a joint account, what consequences will this have?
Will these be gifts?  (The stockbroker assumes that the account is
already Community Property.)
If so, is there a way to minimize the effect?  I wouldn't want the
parcels to be revalued.  Can I quitclaim a half interest to establish
joint ownership?
In case of death, will inheritance tax be due or half the value of
each parcel and the account?
(The rate progression probably would have a bearing.)
If imputation or a quitclaim does not give rise to tax, and one of us
is obviously fading, could either of these methods be used to transfer
half or full ownership to the presumed survivor, again without giving
rise to tax?
Would this also be possible for the joint account by imputation?

What did I forget to ask? :-/
I had better set a higher price than I first intended.
Many thanks for your interest and help.
Myoarin

Clarification of Question by myoarin-ga on 26 Sep 2005 15:43 PDT
Hi, I am just trying to pull this back up to the top of the stack.
I hope one of you looks at it.
Many thanks, Myoarin

Clarification of Question by myoarin-ga on 30 Sep 2005 10:29 PDT
Okay, so I am asking several questions, but I think that they all fall
in couple of clear categories that tax and law savvy Researchers could
access and answer.
If you have a problem with the way I asked or the content of the
questions, I would appreciate a comment.
Regards, Myoarin
Answer  
Subject: Re: California Community Property Law and inheritance
Answered By: wonko-ga on 03 Oct 2005 15:50 PDT
Rated:5 out of 5 stars
 
Dear myoarin:

Regarding your concerns about the tax consequences resulting from your
spouse inheriting your real estate and stocks, I am pleased to report
to you that my research indicates you need not be concerned about
taxation in the United States.  Any assets your spouse inherits from
you are not subject to Federal estate tax, and there is no separate
California estate tax.  Whether or not the country in which your
spouse resides would have a basis for taxing your estate is beyond the
scope of this Answer.

You can add your spouse's name to the title of the real estate and/or
your brokerage account without creating tax consequences.  There is no
California gift tax, and gifts to a spouse are not subject to federal
gift tax.  However, you would then give her the right to make
transactions in the brokerage account, and it would then be included
as part of your community property.  If your ownership of the real
estate predated your marriage, it is your separate property unless you
give her part ownership of it.  Since the stock was inherited, it also
is not part of your community property, but is instead your separate
property unless you give her an ownership interest.  There are tax
advantages to holding property as community property rather than as
joint tenants or as tenants in common if a portion of it is to be
passed on to someone other than your spouse because the cost basis of
all community property is stepped up.

While it looks like you are in the clear and she will receive your
assets without tax consequences if your will gives them to her, I
encourage you to consult with an attorney familiar with estate
planning issues.  This is especially important if you desire to pass
on a portion of your estate to someone other than your spouse.  There
may also be issues arising from the country in which you and your
spouse currently reside that need to be addressed.  Finally, there may
be steps you can take through a living trust that would assist your
spouse in receiving your assets quicker by avoiding probate that a
simple will cannot accomplish.  Creating a Transfer on Death
assignment for your brokerage account could also be helpful in
ensuring a smooth transfer of those assets.

Sincerely,

Wonko

Sources:

Generally, gifts to your spouse are not taxable gifts.  "Gift Tax
Questions" Internal Revenue Service
http://www.irs.gov/businesses/small/article/0,,id=108139,00.html.

"Marital Deduction: One of the primary deductions for married
decedents is the Marital Deduction. All property that is included in
the gross estate and passes to the surviving spouse is eligible for
the marital deduction. The property must pass "outright." In some
cases, certain life estates also qualify for the marital deduction."

"Estate Tax Questions" Internal Revenue Service
http://www.irs.gov/businesses/small/article/0,,id=108143,00.html

"California is a community property state which means that any
earnings and assets acquired during the marriage belong equally to
both spouses, regardless of who actually earned the income. Property
acquired before marriage, or gifts and inheritances received by one
spouse during a marriage, are generally the separate property of that
spouse.

Upon the death of either spouse, the community property is split
equally and the surviving spouse receives his or her share of
community property outright. The deceased spouse's 50 percent share of
community property is part of his or her estate and is subject to his
or her will or living trust."

California no longer has a separate gift tax or estate tax.

"With community property, even though 50 percent passes outright to
the surviving spouse, both portions of the community property receive
a stepped-up basis at the death of the first spouse."

"The decedent's gross estate is entitled to deduct all amounts passing
to a surviving spouse which qualify for the marital deduction. The
marital deduction can become extremely complicated, but it represents
the most important deduction available to married couples. Property
which passes to the surviving spouse under the marital deduction
escapes taxation on the death of the first spouse, but that property
then becomes part of the surviving spouse's estate for estate tax
purposes. Oftentimes, because the surviving spouse is in a higher tax
bracket, property passing under a marital deduction is taxed at a
higher rate at the death of the surviving spouse.

The marital deduction applies to property that is left: (1) outright
to a spouse; (2) in trust in which the spouse has the right to
withdraw any or all of the property during his or her lifetime; and
(3) property which is left in trust for the spouse's life under a
Q-TIP ("qualified terminable interest property") trust. "

"Estate Planning" Robert L. Sommers (2003)
http://www.taxprophet.com/pubs/estat_nl.html

"A major advantage of community property for married couples occurs
when one spouse dies. The entire community property asset is revalued
to fair market value, not just the decedent's 50% interest, thereby
eliminating any tax on the asset's appreciation to the date of death.
In contrast, only the decedent's 50% share is revalued if the property
was held as joint tenants or as tenants in common. Note: This 50% rule
only applies to married couples holding property in joint tenancy. "

"Hidden Dangers of California's Community Property Law" The Tax Profit
Newsletter (April 2005)
http://www.taxprophet.com/newsletters/0504nl.html

Search terms:
California spouse estate tax
surviving spouse tax IRS

Request for Answer Clarification by myoarin-ga on 04 Oct 2005 07:12 PDT
Dear Wonko,
Thank you for braving the chance that I might complain about not all
questions being answered.  I won't. :)  I was just about to take
Scott's advice, so you have saved me the effort of trying to sort out
the questions. Thanks again.
Having read the links, I have deleted most of my requests for clarification.

But I don't really understand this:  "There are tax advantages to
holding property as community property rather than as joint tenants or
as tenants in common if a portion of it is to be passed on to someone
other than your spouse because the cost basis of all community
property is stepped up."

What effect does this have if the survivor leaves the property to the kids?
Wouldn't the market value at that time be used. So what does the
stepped up value have do with it?

In general, it seems that the marital deduction really is the answer
to most of my questions, and that it behooves me to create community
property of all my assets, both to simplify transfer and to allow a
more favorable basis for capital gains tax on disposal of assets.

In one site, it spoke regularly of "domestic" partners, which reminded
me that in an answer to a related question, there was mention of
Community Property applying to "residents", presumably of the state
(also Cal.).
Is there any question that we as non-residents are not eligible to
elect to create Com. Property?

I did ask about how to document including my wife on the real estate,
but if that is more a legal than tax question.  If you don't know
right off, forget it. I can post a new question.

Again, many thanks for your help, 
and regards, Myoarin

Clarification of Answer by wonko-ga on 05 Oct 2005 11:47 PDT
This is the tax advantage of community property:

"It is usually better to take title to your home as Community Property
rather than Joint Tenancy.

Many California married couples own their homes as "Joint Tenants"
because they want the home to automatically go to the surviving spouse
without going through probate. However, property held as Community
Property receives better capital gains tax treatment than property
held in Joint Tenancy on any subsequent sale of the property after the
death of one spouse.  Also, Community Property, like Joint Tenancy,
does not pass through probate.  If your home is currently held in
Joint Tenancy, a new deed can be drafted transferring your home from
Joint Tenancy to Community Property without triggering a property tax
reassessment."

"Archived Tips" http://www.tvcfund.org/pages/Archived_Tips_of_the_Week.htm

Page 6 of the following reference also describes this, as well as the
possibility of preserving community property status even if one does
not reside in a community property state.  It appears to me that if
the deed says it is community property, then there is an excellent
chance it will be treated that way for estate tax purposes.

"Estate Planning When Clients Cross State Lines" by William M. Rich,
Holland & Knight LLP (Spring 2005)
http://www.hklaw.com/content/newsletters/privatewealthservices/spring05.pdf

Page 5 of the following reference describes how the value of real
estate is reported to the IRS for estate tax calculation purposes: 
"Form 706" http://www.irs.gov/pub/irs-pdf/f706.pdf.

To change your ownership of the property, you file a new deed with the
county recorder where the property is located.  I have provided you
with forms available for purchase and a book that may interest you
that describes all of the different ways you can own property in
California:

"California Deeds and Recording Documents" JurisDocuments
http://www.jurisdocuments.com/Deeds_Index.htm#Grant

"Deeds for California Real Estate" Nolo Press
http://www.nolo.com/product.cfm/ObjectID/EA97C65D-B6FD-4133-B9BE746E546DB381/213/243/

Sincerely,

Wonko

Clarification of Answer by wonko-ga on 05 Oct 2005 17:32 PDT
Thank you for your generous tip.  It is greatly appreciated.

Wonko
myoarin-ga rated this answer:5 out of 5 stars and gave an additional tip of: $25.00
Many thanks Wonko.  I haven't yet read the links, but trust that they
will provide additional information  - as the previous ones did. 
Thanks for coming back with your clarification, and enjoy the tip to
make up for GA's share.
(Now I will go back and comment that I think an elevator is a good investment. ;-)

Comments  
Subject: Re: California Community Property Law and inheritance
From: steve_in_ca-ga on 30 Sep 2005 11:29 PDT
 
Hi myoarin,

You posted a few clarifications to question ID 571241.  Although it
wasn't 100% was I was looking for, you did provide enough info to
serve my purposes.  I'm new at google answers, but I believe if you
return to that question ID and post your comments as an answer, I can
pay you the $15.  I couldn't find any other way of contacting you,
other than posting here.

By the way, it was your mention of prohibition that really worked well
for my speech.  It also got me thinking about other things in the
1920s-30s that might qualify, which led me to the Glass-Steagall act
(which legislated banks out of certain industries).  Similar
legislation in the 1950s also legislated banks out of industries like
underwriting insurance.  But it was your mentioning prohibition that
got me started.

Steve
Steve@RealScienceOfSuccess.com
Subject: Re: California Community Property Law and inheritance
From: myoarin-ga on 30 Sep 2005 17:36 PDT
 
Hi Steve,
Thanks for tracking me down here.  I am real glad that I could help
and especially that your speech was a success. Your question is still
open so I will post my comments there, as you could have.  GA doesn't
like people to included e*mail addresses.
Regards, Myoarin
Subject: Re: California Community Property Law and inheritance
From: justaskscott-ga on 30 Sep 2005 21:09 PDT
 
Myoarin,

I think the main difficulty is that Researchers are reluctant to
answer a series of questions -- especially questions that require
significant research -- asked together.  If we do all of the research,
and find out that we can answer only four of the seven questions, or
even six of the seven, then we can't post an answer.

If you are able to ask your questions separately -- i.e., break this
question into two, or better yet more, questions -- you might have
better luck.  For each separate question, you can refer to this
original set of questions, so that we understand the full picture.

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