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Investment Planning |
Titling Your Property
Under the current U.S. tax system, only married couples can take advantage of the unlimited marital deduction, meaning that an unlimited amount of assets can be passed from one spouse to the other in life or at death. In a non-traditional relationship, careful planning must be done to transfer assets from the wealthier partner to the less-wealthy partner in an attempt to equalize estates and to provide for the well-being of the less-wealthy partner.
The way that you title your property while you are alive can have a significant tax impact after you die. It's important to remember that state law governs this area, so you should seek the advice of an Estate Planning attorney who can address your specific situation. Assets such as stocks, mutual funds, and real estate held outside of a retirement plan can be titled in one of the ways specified below.
If you live in a community property state, you can enjoy additional tax benefits if you are married and your assets are titled as community property. When you die holding community property, the entire property gets "stepped up," which means the fair market value on the date of death becomes the cost basis for your heirs. If and when the property is later sold, any capital gain will be determined based on the stepped-up value. For appreciated property, this means you pay less capital gain tax. Titling property as community property with rights of survivorship ensures the basis step-up at death and avoids probate on the assets of the first spouse to die. The community property states are:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
Separate property includes any assets that you have before marriage, as well as gifts, bequests, personal injury settlements and inheritances that you receive while you are married. To keep this property separate, don't co-mingle it with your spouse's assets. Wages and other income you earn while married are not separate property and are considered owned by both spouses. In the absence of a nuptial agreement, keeping separate property may accomplish some estate planning goals. However, once property is co-mingled it cannot be separated later for estate tax purposes.
Joint Tenancy with Rights of Survivorship provides an automatic, direct transfer of the deceased person's interest in property to the surviving joint tenants. The decedent's interest transferred receives a step-up in basis, resulting in the elimination of any built-in capital gain on that share of the property. Assets held in joint tenancy can be held by a married couple, or by two or more related or unrelated persons. Usually, consent of the joint tenants is not required to sell, gift or transfer an owner's share of the property. Each owner must report an equal share of income on their tax return, regardless of the amount of income that they actually receive from the property.
The key element in joint tenancy is that when a joint tenant dies, his rights in the property are transferred to the surviving owners. The assets transferred do not go through probate, and the joint tenancy agreement supersedes a will or trust regarding distribution of property. The survivors own the property in totality, with full legal and beneficial title, and can pass the property on to their heirs through a will or other estate planning method. Partners in non-traditional relationships often title their property as joint tenants.
Tenancy in Common is a way for a married couple or two or more unrelated persons to share ownership of property. Each tenant owns an undivided fractional interest in the property, according to the proportion specified in the title document. Income rights in the property are based on each tenant's proportional interest. Since each tenant can sell, gift or transfer his interest without consent of the other owners, you should feel comfortable with your co-tenants before you enter this type of property ownership situation.
Consider a tenancy in common situation carefully, since it has the potential to become a nightmare. Under tenancy in common, a departing tenant has full legal right to sell his property without his other tenant's consent. On the death of one person in a tenancy in common ownership situation, that interest receives a step-up in basis for tax purposes, eliminating any capital gain that would have existed at that point in time.
Tips Disclaimer
These tips contain information that may change over time as a result of new tax legislation. Although we make efforts to keep this information current, you should check with your tax advisor before taking action based upon any information contained in these tips.