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Securing Double Stepped-Up Basis For Community Property (But Not Joint Tenancy)

It is possible for a surviving spouse to gain an enormous tax benefit that allows the sale of capital assets to be completely income tax-free at the first spouse’s death. Put another way, the IRS ignores all the appreciation that occurred up until the first spouse’s death. So even if the surviving spouse sells the assets years later, the survivor will only pay taxes on the appreciation that occurred after the death of the first spouse. Few legitimate opportunities exist to escape taxes – this is one of them.

This benefit can be referred to as the “Community Property Death Benefit” or the “Double Stepped-Up Basis for Community Property” because both the deceased and surviving spouse’s basis steps up at the first death. Simply put, this is one of the most generous tax benefits in all of the tax code. However, the double stepped-up basis, solely available to married couples residing in community property states, will only apply if there is written evidence or declarations that the property is considered community property, and at death, it is actually passed as community property.

A Word Of Warning: Joint Tenancy Destroys This Benefit.

In other words this major tax advantage is not available if the couple holds title as Joint Tenants and passes the property to one another through Joint Tenancy (or has children and others on title as joint tenants). The good news is that married couples are always free at any time to agree on property ownership rights so the effect of a written agreement stating that you consider assets community property overrides any Joint Tenancy designations.

That is why taking steps to secure the community property death benefit is potentially one of the most important estate planning moves any couple can make – and why our law office and most law offices make it a routine part of the trust process. At your direction we will include a “Community Property Agreement” that satisfies the IRS written requirements to obtain this benefit – and overrides any Joint-Tenancy designations or possible ambiguities on other assets. However:

WE ARE ONLY WILLING TO PREPARE A COMMUNITY PROPERTY AGREEMENT FOR THOSE OF YOU WHO ARE 100% COMFORTABLE AND IN FULL AGREEMENT.

That’s because we are a living trust law office, not a family law practice and it is not the business or expertise of this law office to analyze or determine or advise either spouse as to what is or is not the community property of either spouse; or what is or is not the separate property of either spouse — or any rights thereto. Our objective is to help couples qualify for the tax benefit and only those who are completely and unambiguously comfortable legally agreeing as to the status of their property should do so.

If you are not completely comfortable with, or you are confused, or do not understand, you are hereby instructed to seek separate legal counsel for advice on community and separate property issues. Our office cannot and will not analyze or advise a couple on spousal property rights.

Click here to learn about the Conflict Agreement and Community Property Worksheet (for married couples only)

If you are fully comfortable and in agreement you are welcome to execute any Community property agreement you ask us to provide.