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
|
