Posts Tagged ‘Nevada’

Joint Tenancy with Right of Survivorship, or Community Property?

MARCH 24, 2014 VOLUME 21 NUMBER 12

Which is better? How should we take title to our house? How about our brokerage account?

These questions are really common in our practice. The answer is actually pretty straightforward, but we do need to lay a little groundwork.

Arizona is a community property state. That means that property held by a husband and/or wife is presumed to belong to them as a community. That presumption does not apply if the property existed before the marriage, or was received by a gift or inheritance. There are special rules for property you owned in a non-community property state before you moved here. It’s also possible for a married couple to enter into an agreement that changes the nature of community property, but those agreements are relatively rare.

Historically, there was one great disadvantage to community property ownership, and one great advantage. That is, there was one advantage and one disadvantage if you assume that the couple would never get divorced. If you have substantial separate property and are considering turning it into jointly-held property, is that advisable? That question is beyond our short essay today, and the answer depends on your comfort level with your spouse and marriage. We’re not particularly accomplished marital counselors, and we don’t have any facts for your personal situation.

But assuming you and your spouse live together more-or-less-happily until  one of you dies, here are the competing considerations to holding property as community property:

Advantage: Income taxes. Upon the death of one spouse, property held as community property takes on a new “basis” for calculating future capital gains. If you have stock that you bought at $1,000 and that you now sell for $10,000 (congratulations!), you have “recognized” $9,000 of gain and will pay income taxes based on that amount. But if you held that property in joint tenancy with your late spouse, it got a step-up in basis to his or her date-of-death value; assuming the stock was worth $10,000 on that day, your income tax is only on $4,500 of the total gain. But if you had held that stock as community property with your late spouse, there would be no capital gains tax on the sale at all.

Disadvantage: Probate. Until 1995, community property could not pass automatically to the surviving spouse. That meant that a probate was often required to transfer the deceased spouse’s community property interest to the surviving spouse. Since no probate was required for property held in joint tenancy (the “right of survivorship” part of joint tenancy means the surviving joint tenant receives the property without having to go through the probate process), most married couples opted for joint tenancy rather than community property.

In 1995, the Arizona legislature made the disadvantage to community property disappear — they created a concept of “community property with right of survivorship.” That means a married couple can have it all: they can get the full stepped-up basis for income tax purposes, but avoid probate, on the first spouse’s death.

Does that mean that all property should be titled as community property with right of survivorship? Almost, but not quite. There are a handful of problems that occasionally crop up and have to be considered:

  • Not every married couple intends to leave everything to one another. You can still get the full stepped-up income tax basis and leave your share of community property to someone else — your children from a prior marriage, perhaps, or another family member. In such a case it might make sense to hold the property as “community property” (with no right of survivorship) but have a will or trust to make provisions for each spouse’s share.
  • The income tax benefit does not always appear. Note that the benefit is not a direct tax savings, but only a potential savings. If you get a full stepped-up basis on property that you then hold until your own death, you haven’t really saved any tax money. But the community property benefit just might give you flexibility — you can decide to sell property after your spouse’s death on the basis of good investment advice, rather than the tax effect.
  • The option only applies (this is obvious, but we need to say it) to married couples. “Community property” is not available to anyone else. Is it available to same-sex married couples? We think so (see our articles on the subject over the last few months here, here and here), but we might turn out to be wrong about this.
  • The benefit may not even be necessary for some assets. No growth in your brokerage account? No benefit. You invest only in municipal bonds and certificates of deposit? Minimal to no benefit. But here’s the big one: most people’s biggest growth asset is their home — and there’s already a substantial ($250,000) exemption from capital gains taxes for a single (widowed) person selling their home.
  • Have you already established a trust as part of your estate plan? You may not need to go through the analysis, since the practical effect of your plan may be the same as the benefit of community property with right of survivorship — or better. Ask your estate planning attorney to review this with you.
  • There are sometimes costs to making the change. For real estate, you will need someone to prepare a deed (you can probably get it right on your own, but it makes sense to hire a professional). In addition, there are modest costs to record the new deed.
  • This only applies to Arizona property. No problem with your brokerage or bank account — they are Arizona property if you live here. Your vacation cottage in Montana, or your Mexican condo held in a land trust, are a different matter. But if your vacation cottage is in Alaska, or California, Idaho, Nevada or Wisconsin, you might be able to do something similar. Ask a local lawyer about the possibility.
  • We need to reiterate: if you have separate property and transfer it to community property with right of survivorship to take advantage of income tax benefits, you may have made a gift of half of your separate property to your spouse. Be careful, and make sure you know what you’re doing.

What’s your bottom line? Should you change everything you own from joint tenancy with right of survivorship to community property with right of survivorship? Maybe, but your home is the least urgent thing to tackle. Your brokerage account? Absolutely. Your summer cottage in another state? Check with your lawyer and ask her (or him) to find out whether the other state has community property with right of survivorship.

Note that none of this really helps you deal with retirement accounts, IRAs, 401(k) accounts, separate property you brought from another state or your complex estate planning intentions. For those, you really need to talk with your lawyer. Also, please be clear: we do not know the correct answer if you live in a state other than Arizona — talk to your local lawyer about that.

 

Arizona Legislature Changes Format For Beneficiary Deed

APRIL 3, 2006  VOLUME 13, NUMBER 40

Five years ago the Arizona Legislature adopted an interesting new law. Modeled on a similar law in Missouri, the “beneficiary deed” statute permitted property owners to designate who would receive their property on death—much like a “payable on death” bank account. Now the state legislature has revisited beneficiary deeds, and made them even more flexible and useful.

One unanswered problem arose a handful of times under the previous law. What would happen if a person named to receive property by a beneficiary deed died before the original property owner? If, for example, a parent signed a beneficiary deed to “my two children, John and Mary,” and Mary died before the parent leaving children of her own, did that mean that her children would receive her share, or that son John would own the entire property on the parent’s death?

Effective this fall (the date is not yet set and won’t be known until the legislature adjourns) beneficiary deeds can solve that problem. Under a law signed by Governor Napolitano on March 24, 2006, all new beneficiary deeds must include a paragraph indicating which of two choices the owner prefers. The language required by the new law:

If a grantee beneficiary predeceases the owner, the conveyance to that grantee beneficiary shall either (choose one):

[] Become null and void.

[] Become part of the estate of the grantee beneficiary.

There are still a number of important issues to remember in the use of beneficiary deeds, and it will not be appropriate in every case to use this approach to transfer property. With some of the following limitations in mind, however, it may be that the beneficiary deed is a simple, inexpensive and useful method to avoid probate, especially in small estates. Among the remaining limitations for beneficiary deeds:

  • They are not available in every state. As of this writing, only Arizona, Arkansas, Colorado, Kansas, Missouri, Nevada, New Mexico and Ohio permit the use of beneficiary deeds.
  • An individual using a beneficiary deed will need to coordinate his or her estate plan as to multiple assets—it may, for instance, be necessary to keep track of beneficiary designations on multiple properties, several bank accounts, and a number of insurance policies and brokerage accounts. Anyone with more than a handful of assets should probably consider a living trust instead.
  • A beneficiary deed can be changed by a surviving owner, so in the case of a husband and wife (for example), the final distribution is not set until the second death.
  • The beneficiary deed provides no estate tax planning benefits for larger estates.

And what about individuals who signed an Arizona beneficiary deed before the new law was passed? Nothing in the law requires them to change their deeds, but they would be well-advised to consider updating the language to clarify what would happen if a beneficiary died before them. For those who might sign a beneficiary deed between now and the effective date, the best approach is less clear. Both the existing law and the new version require that beneficiary deeds be “substantially in the following form”—and then the form changes. Our advice: if you plan on signing an Arizona beneficiary deed in the next few months, expect to sign an updated version this fall.

Arizona Community Property Is Not Always Subject To Probate

OCTOBER 9, 2000 VOLUME 8, NUMBER 15

Arizona is one of nine “community property” states in the country, and that can be the source of some confusion about estate planning, taxes and property ownership rights for married couples. Recent changes in Arizona’s law make the “community property” designation a little more friendly and understandable, and the benefits to this unique property ownership choice are now clearer.

“Community property” concepts were not part of the English common law. Under the system imported to most of the American states, property was owned by one spouse or the other, though the non-owner might acquire some rights in his or her spouse’s property. The French and Spanish, however, understood the marital community to be a separate entity from either spouse individually, and permitted the “community” to own property. Each spouse then holds an equal interest in the community’s property.

Those American states with rich Spanish or French histories tended to adopt some version of the community property concept. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community property states, although the method of implementing the concept varies somewhat. Alaska also permits some trust assets to be held as community property.

In community property states a married couple is presumed to hold assets as community property regardless of the actual title on the asset. Couples may, however, choose to hold their property in joint tenancy or as tenants in common if they wish.

One important advantage to having assets titled as community property comes, oddly enough, from federal tax law. Although capital gains taxes are ordinarily due any time an appreciated asset is sold, the increased value of property held by a decedent at the time of death is not taxed. The property’s income tax “basis” is said to “step up” to its value on the date of the owner’s death, often resulting in substantial income tax savings for heirs.

Jointly owned property only receives a partial “step up” in basis. Property held in joint tenancy will usually only get half the income tax benefit on the death of one joint owner. Community property, however, is treated differently: the entire value of a community property asset gets “stepped up” to the value on the first spouse’s death, resulting in twice the income tax savings.

The main drawback to holding community property in Arizona has long been the requirement of a probate proceeding to pass the property to the surviving spouse. Although the long-term tax savings can be substantial, the probate costs are immediate and, in most people’s minds, too high. Since 1995 Arizona has permitted married couples the best of both worlds: property can be held as “community property with right of survivorship” and secure the favorable income tax treatment while still avoiding the probate process. The value of this type of property ownership is, of course, restricted to married couples.

One caveat: some commentators, relying on fairly arcane interpretations of the federal tax law, argue that the “community property with right of survivorship” designation could conceivably be found to result in no step up in tax basis at all. So far the federal government has not taken such a position, but there remains some slight possibility of a problem. In addition, the effect of titling separate property as community property (with or without the “right of survivorship” language) has more than just tax effects. In other words, you should consult an Arizona attorney before changing title on your existing assets or deciding how to title a new acquisition.

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