CA Estate Planning Blog

Monday, March 30, 2009

The Hazards Using a Will and Joint Tenancy as Your Estate Plan

If you have friends, family or clients that currently hold title to property in California as Joint Tenants, you will want to urge them to change the way they have their property titled.  While joint tenancy has the advantage of immediate transfer of ownership to the survivor upon the passing of one of the joint owners, joint tenancy can also result in significant increase in income tax liability.  Also, if they still have real estate titled as joint tenants, it is a pretty good indication that either they have not done any estate planning or have done estate planning and have failed to change the title of the property into their living trust.

Under current law, if you inherit property, your tax basis in the property will be stepped up to market value as of the day the owner died.  In other words if the property is worth $500,000 when you inherit it and then you sell it for $500,000, you will not owe any income or capital gains taxes.  If the property is held as community property , this scenario is also true as the surviving spouse gets a stepped up basis on both halves of the community property.
However, if a property is held as joint tenants, the surviving owner(s) only get a stepped basis on the ownership of the deceased owner.  Thus if a couple pasy $200,000 for a property, one spouse passes when the property is worth $500,000, the surviving spouse's basis in the property will be stepped up to $350,000 ($100,000 of original basis plus deceased spouses stepped up basis of $250,000).  If the spouse then sells the property for $500,000, taxes may be owed on the $150,000 profit.  If the couple had title the property as community property, the surviving spouse would have received a stepped up basis of $500,000 and then would not have owed any taxes on the sale of the property.
In California, married couples now have the option to hold title as community property with the right of survivorship.  This form of ownership offers the tax advantages of commnity property with the immediate transfer of ownership of joint tenancy.  There is no good reason for property owners to continue to use joint tenancy.  Better yet. when my firm drafts a Living Trust for our clients, one of the documents we create for married couples is a marital property agreement which will convert all joint tenant titled properties into community property once the property is retitled into the name of the trust.  Thus property owners will be able to avoid probate and potentially reduce the tax liability of their heirs.

One additional reason not to rely on joint tenancy to serve as your estate plan is that you may not want the surviving spouse to own the property 100%.  If you intend that your share of the community property including your real estate go to your children, there is no assurance that your spouse will include your children in their estate planning.  This is especially an issue when you have children from a prior marriage for whom you would to pass on your share of the property to.

If you have any questions, please feel free to contact us at 949.242.4514 or use the contact us link to the left.

Monday, March 30, 2009

Estate Planning Law Changes in 2009

Changes in Estate Planning for 2009

In 2009, several changes have occurred that impact estate planning including: (1) A rise in the Annual Gift Tax Exclusion for Gifts to $13,000 from $12,000, (2) The unified estate tax credit (if you pass on with assets below the credit, your estate will not owe any estate taxes)  increases to $3.5 million dollars from $2 million dollars., (3) The Annual Gift Tax Exclusion for Gifts to Non-Citizen Spouses increses to $133,000 from $128,000

Proposed Changes in 2009 for Estate Planning

H.R. 436: 2009-2010 Certain Estate Tax Relief Act of 2009 is a bill that is working its way through congress that will go into effect on January 1, 2010. This bill proposes the following: (1) The unified estate tax credit shall be for 2010 and beyond $3.5 million dollars, (2) The estate tax above the credit will be 45%, (3) Current carryover tax basis laws will continue for 2010 and beyond, (4) Estates over $10 million dollars will phase out the graduated rates in the form of an additional 5% tax, (5) IRS valuation discounting of non-business assets owned by a corporation or LLC will no be allowed. The lifetime gift tax exclusion shall remain $1 million dollars.

What does this all mean?

Assuming H.R. 436 is passed, the bottom line for all of these changes is that the estate tax is here to stay but only a small percentage(less than 2%) of Americans will need to worry about the estate tax. For those high net worth individuals with estate tax issues, they will no longer be able to use Corporations or LLC's to discount the value of passive assets such as cash and securities. This does not affect the ability to discount the value of businesses and investment real estate in an LLC or Corporation.

If this bill or a similar bill is not passed this year, in 2010 there will be no estate tax and in 2011 and beyond, the estate tax exemption will drop to 1 million dollar with maximum tax rate being 55%.

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