Let’s take a few minutes to dish about the topic of the “basis” of your assets. It’s a deceptively tricky topic. Although it appears to be a fairly simple calculation when someone asks, (say there, what’s your basis in this beautiful cabin on the lake?) there is much more to consider than simply how much you paid for it way back when. This whole discussion becomes important when you decide you want to sell your asset and need to figure out what amount will be taxed. And in the Estate Planning world, it can take on another entire life of its own, depending on the simple act of declaring who owns the property, and how it is stated. Each commonly used title choice has different benefits and concerns.
Most of us remember our realtor telling us that Joint Tenancy with Right of Survivorship is what “all the married people do.” What exactly does that mean anyway?
It’s like this. Say you have an apple pie you bought at the store. If you owned it jointly with another person, you each have a one-half interest in the pie, without cutting into it, and either of you can take the whole pie to your house, but that doesn’t mean you don’t still own your half. You could give ownership of your half to anyone you like at any time. In addition, each owner will have right of survivorship over the pie, which means that one of the Joint Tenants will own the whole pie if the other person passes away.
So then isn’t Community Property just the same thing? Actually it is very different! In the state of California, if you are married, the “community” owns the entire pie. Because of this, anything you own as community property allows the other person (your spouse) as well as your children to each get an interest of your half of the pie after you die (unless you leave a specific will saying differently.) Another choice is that you can hold your title as Community Property with Right of Survivorship, which is very similar to Joint Tenancy because the spouse is entitled to the entire pie if you pass away.
Well if that is the case, what is so different about Joint versus Community if the “right of survivorship” gives the entire pie to your spouse? Let’s compare them. If you created a Joint title, you each only own 50% of the pie, so the basis (remember it’s what you have paid for it) on your half of the pie is the only part affected with the allowance of a “step up” when you die (increase of basis to the current value.) Why is that important? Let’s say your spouse wants to sell that big beautiful pie for something less filling? His or her half of the pie still has the previous lower basis (and taxes could apply to that part!) If instead you had called it Community with Right of Survivorship, the entire value of the whole pie is now stepped up.
Of course there are pitfalls in choosing Community versus Joint, so you should always consult a professional to see what works best in your individual situation. But not taking the time to consider it can unnecessarily cut into your estate leaving a smaller piece of the pie for your family, so be sure to ask the question. You still have time to take advantage of the best flavor of title for you and your family.