Trusts in community property states often contain a provision stating that
community property transferred to the trust by a husband and wife remains their
community property within the trust and that separate property transferred to
the trust by either spouse remains that spouse's separate . This provision is both important and complex.
one spouse dies, the cost basis of community property (both the deceased
spouse's half and the surviving spouse's half) is increased (stepped up) to the
value of the asset at the first spouse to die's death. Joint tenancy assets only receive a basis
stepup when one spouse dies on that spouse's half of the asset. Some estate
planning attorneys help the client to transmute (change the character of) joint
tenancy assets to community property. This may be done by an assignment
separate from the revocable trust, or
through language in the Trust itself, or by deeding real estate first from
joint tenancy to community property and
second from community property to the trust.
attorneys have both spouses sign an agreement changing the character of all
their assets to community property. If
effective, this means that a spouse owning separate property has gifted half of
it to his or her spouse. One problem
with this approach is that it fails to give each spouse a separate lawyer who
can explain the pros and cons of this change.
Specifically, if the spouses later divorce, the one who made the gift
may claim that he or she thought that the couple was qualifying for a tax
benefit (double step-up) and that no one adequately explained the economic
consequences of the change on divorce.
Changing joint tenancy to community
property may be less problematic. Both spouses typically already own a half
interest in the joint tenancy property, so converting it to community property,
which is another form of 50/50 ownership, would not amount to a gift.
spouse has acquired a property as separate property and prior to signing the
estate plan, he or she has deeded the property to community property. Sometimes, the spouses have acquired property
as community property and prior to signing the estate plan, it was deeded to
one spouse as his or her separate property. These and other more complex
situations may warrant a post-marital agreement to define the character of all
assets with each spouse represented by a separate attorney.
Spiro is a Beverly Hills attorney who is a certified specialist in
Taxation and in Estate Planning, Probate and Trust Law. He holds a Masters
Degree in Taxation from Golden Gate University and has taught tax and estate
planning courses at UCLA and USC. He has been named as Super Lawyer by
Los Angeles Magazine.
Access Randy Spiro's
Martindale-Hubbell profile on www.martindale.com