How should a couple take title to their home if they intend to keep it?  How is the asset to be taxed after both spouses pass?  Many couples keep the asset in “Joint Tenancy” which allows the asset to avoid probate upon the death of one of the spouses.  Upon the death of the first spouse the full ownership of the asset remains with the surviving spouse.  Another way to title a property is as “Tenants in Common.”  Electing to be tenants in common is a form of partnership which does not pass survivorship rights to other co-owners.  When one of the “tenants” passes away the ownership interest passes to their heirs.  This can create many complex tax and business challenges.

How should a couple take title to their home to minimize taxation in the future and protect the assets they intend to pass on to their loved ones?  The best way to take title to your home if you are spouses is to deed it as “Community Property.”  This should be placed in a revocable trust.  Lets take a look at the difference between “Joint Tenancy” and “Community Property” from a taxation point of view.  Let’s assume the property was purchased for $450,000 and placed into the trust as a joint tenancy.  The tax basis will be the $450,000 purchase price.  Upon passing of the first spouse half of the property (the deceased spouse’s community interest) is placed into an irrevocable trust.  Upon passing of the surviving spouse the trusts (irrevocable and revocable) pass to the beneficiaries.

The beneficiaries receive a “step up” in basis for the survivor’s interest equal to half of the property.  If the value of the home is now $900,000 and the beneficiaries elect to sell it, the “basis” is half of the $950,000 (or $475,000) for the surviving spouse’s interest and and the basis of the first spouse to pass which is half of the $450,000 purchase price or $225,000 resulting in a total tax basis of $700,000 combined.  The sale of the property for $950,000 results in a $250,000 capital gain which results in a substantial tax liability.

On the other hand, if the property is deeded as community property there is no event related to the passing of the first spouse, and upon passing of the surviving spouse the beneficiaries of the trust receive the full “step up” basis value of the house, meaning the new tax basis is $950,000.  If the property is sold the purchase price equals the tax basis meaning there is no capital gain for the beneficiaries based upon the sale of the house.

Questions such as how should a couple take title to their home and how can assets be passed on to beneficiaries in the most efficient and cost-saving manner require insight from both the perspective of estate planning and trusts as well as tax.  The integrated tax, estate planning, trust and accounting services of Allen Barron provides you and your family with sound advice based upon a broader perspective.  Existing trust and estate plans should be reviewed every two to three years to account for changes within the family and beneficiaries as well as updates to federal and state laws.  We invite you to contact Allen Barron or call 866-631-3470 for a free consultation to review your existing estate plan or to begin the conversation of planning for your family’s future.

 

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