5 Key Points to Help You with Income Tax Planning

Who needs a Community Property Agreement? Married individuals who own property that has appreciated or is expected to appreciate during their lifetime. The most common examples of such property are stocks and real property. How do I get started or learn more about whether I can benefit from executing a Community Property Agreement with my spouse? We, at the Atashi Rang Law Firm, would be happy to schedule a meeting or call to discuss whether this agreement is a good fit for you. Call us today to get started and do not hesitate to contact us with any questions.

5 Key Points to Help You with Income Tax Planning
by Amir Atashi Rang*

Amir Atashi Rang is the principal of The Atashi Rang Law Firm, P.C. in San Francisco. He is a Certified Specialist, Estate Planning, Trust and Probate Law, State Bar of California Board of Legal Specialization. Mr. Atashi Rang is an adjunct professor at Golden Gate University LL.M. (Taxation) program and has served as a member of the Executive Committee of the Taxation Section of the State Bar of California. He earned his Bachelor of Science degree from Santa Clara University in Political Science and French, magna cum laude, Phi Beta Kappa, his Juris Doctorate degree from UC Hastings College of the Law, and his LL.M. degree in taxation from Golden Gate University.

Who needs a Community Property Agreement?
Married individuals who own property that has appreciated or is expected to appreciate during their lifetime. The most common examples of such property are stocks and real property.

What is the main benefit of having a Community Property Agreement?
Community Property Agreements allow married couples to take advantage of double step-up in tax basis. Community property receives a 100% step-up in income tax basis to the fair market value of the property on the date of the first spouse’s death.
Thus, when either spouse passes away, the survivor would own the community estate with a complete income tax step-up in basis. If a party maintains a separate property interest only, then when that party passes away, the separate property would receive the stepped-up basis. There would be no step-up in basis if the non-owner spouse died. When the property is eventually sold, the income tax basis determines the gain or loss on sale. In general, it is advantageous to have the highest possible income tax basis to reduce or eliminate gain upon sale.

What are the potential consequences of including separate property assets in the Community Property Agreement?
In general, any property which was acquired by gift or inheritance or which was brought into the marriage is separate property. A person has the exclusive management and control over separate property, including the ability to transfer the property during his/her lifetime or at death. A Community Property Agreement transmutes (alters/changes) any separate property into community property. Thereafter, it will be subject to joint management and control by both spouses. Without transmutation, the party owning the separate property has exclusive testamentary control of the separate property and can leave 100% of it to anyone the party wishes. After property is transmuted to community property, each spouse will have control of one-half of the property.  Furthermore, it is important to go over other potential consequences of a Community Property Agreement, such as (1) Step-down in basis; (2) Exposing an asset to potential creditors; (3) Divorce; and (4) Transfers to a non-citizen spouse.

What are the requirements for executing a Community Property Agreement?
It is necessary to have a written instrument signed by both spouses to obtain the double step-up in basis.  The Community Property Agreement is technically a post-nuptial agreement. To formally characterize assets as community property and execute a Community Property Agreement, each spouse needs to have separate counsel.
For couples who have been married for many years, it often reconfirming that everything is community property.  Nonetheless, the actual language needs to comply with the requirements of California law.

How do I get started or learn more about whether I can benefit from executing a Community Property Agreement with my spouse?
We, at the Atashi Rang Law Firm, would be happy to schedule a meeting or call to discuss whether this agreement is a good fit for you. Call us today to get started and do not hesitate to contact us with any questions.  Here’s an example of how this works:

Tax Chart: Community Property vs. Joint Tenants
Home owned as:
Joint TenantsCommunity Property
Cost Basis at the Date of PurchasePurchase Price (Example: $1,000,000 purchase price 2004)
Current Market Value of Property when First Spouse DiesCurrent Market Value (Example: $2,000,000 market value 2015)
Cost Basis for Surviving Spouse After Death of First SpouseHalf-Step-up to Current Value
This means:Purchase Price +
1/2 the Appreciation (increased value)
(Example: $1,000,000 + $500,000
is the new cost basis)
Full Step-Up to Current Value
This means: Purchase Price + Full Amount of Appreciation (increased value)
(Example: $2,000,000 is the new cost basis)
If Surviving Spouse Sells on the date of Death of First Spouse50% of the increased value is now taxed*
(Example $500,000 is taxable)
No taxable event
user5 Key Points to Help You with Income Tax Planning

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