Community Property, Long-Term Capital Gains, Estate, Gift?
A married couple in California has an Aggregate Community Property Agreement that states all their property, including property “in their name as joint tenants is and shall remain their community property under the laws of the State of California.” They own some mutual funds in their 2-person joint tenancy account.
Q. 1: After each death will the tax basis for all their shares be stepped up to the then-current market value?
Q. 2: If these mutual fund shares are sold 9 months after the first or the second death, will any intervening gains (or losses) in market value after that death be taken as long-term or as short-term?
Q. 3: If this couple transfers these fund shares into a family (5-person) JTROS account, would that change the A.’s to Q. 1 and/or 2? I.e., would the husband and wife while both are alive still each have a 50% community property interest once the account has 3 other joint owners?
Q. 4: Since these fund shares would be part of the first and second deceased’s gross estates, to what extent if any would such a transfer constitute a gift to the other 3 family members assuming none of the 3 acted on the shares until inheriting them?
I appreciate help with these questions.
Permalink Submitted by Alan Spross on Mon, 2008-03-10 17:55
These agreements are primarily for property that is titled to an RLT and used for funding the various trusts after death of the first spouse.
IF there is no trust involved here, then the various investment accounts should be titled “community property with right of survivorship” (CPWROS). This form or registration has only been available in CA for a couple years. It provides the double benefit of probate avoidance and the basis adjustment of the entire account at the first spouse’s death.
IF titled this way, Q1 would be “Yes” (step up OR step down).
Q2) Gains after the first spouse’s death are taxed at the LT rate because holding period follows amount that gets basis adjustment (100%).
Q3) Yes, same rule as for non spouse joint tenancies, eg between parent and child. When parent passes and child contributed nothing the entire account is in the estate of the parent and gets basis adjustment. In this case first spouse to pass would trigger full basis adjustment.
Q4) There is no gift to other family members until one of them withdraws funds from the account and then only the amount withdrawn becomes a completed gift. This applies to bank, brokerage and mutual fund accounts, but not to real estate. Assume that CP interests show as Tax ID and are reporting interest and divendends.
Therefore, the tax aspects of this are positive for the other family members, but there are some creditor concerns with this type of registration.
Permalink Submitted by [email protected] on Tue, 2008-03-11 18:20
Alan, thank you very much for your answers. All are very clear but I am unsure of the following.
If the H and W still have a 50% community property interest after transferring their investment shares to a joint account with their 3 sons, can and should this 5-person account be titled as CPWROS if Vanguard is willing to do so? Or if a 5-person account cannot carry CPWROS or if Vanguard is unwilling to use this designation, would you agree that this account should continue to be JTROS but that a note should be added to the Aggregate Community Property Agreement (ACPA) stating that this account’s assets are community property?
Since you touched on the matter of trusts, perhaps I should add this information: Besides covering their 2-person joint tenancy account, the couple’s ACPA assets are primarily their IRA’s and their house which are approximately equal in value. The house is held by them as Trustees of their Living Trust which has no other assets. They anticipate that the house will basically comprise the Bypass Trust on the first death.
I look forward to your further comments.
Permalink Submitted by Alan Spross on Tue, 2008-03-11 19:28
You are correct that an institution will probably only be willing to title an account as CPWROS if spouses are the sole parties. In your situation here, it would have to be a joint tenancy account and the CP treatment of the marital portion would have to be covered by the ACPA or by any presumptive rules in CA that default marital JT property to that of CP.
Generally, it would be treated as CP, although that status could be more susceptible to litigation if another interested party contended that the assets were in fact separate property of each spouse.
Permalink Submitted by [email protected] on Wed, 2008-03-12 06:53
Alan, thank you very much for the helpful information you provided.