Frequently Asked Questions
Tax and Trust Terminology
Community Property with Right of Survivorship
Some Tax and Trust Terminology
Marital Deduction allows spouses to pass unlimited amounts of property to each other without immediate transfer tax consequences.
Applicable Exclusion Amount is an estate and gift tax credit that shelters specified amounts of transfers of intervivos or testamentary gifts to anyone other than decedent’s spouse.
Survivor’s Trust a/k/a “A” Trust, receives the surviving spouse’s interest in the trust estate. The marital share may be allocated to a separate marital trust or may be allocated to the Surviving Spouse’s Trust.
Credit Shelter Trust a/k/a Bypass Trust, “B” Trust, Exemption Trust, Residuary Trust, Family Trust, Non-Marital Trust is the receptacle for the portion of the Deceased Spouse’s estate subject to estate tax (i.e., not qualified for the unlimited marital deduction) and is used to absorb the Deceased Spouse’s applicable exclusion amount.
Marital Trust a/k/a Qualified Terminable Interest Party (QTIP Trust), “C” Trust, Marital Deduction Trust is generally designed to qualify for the marital deduction and is usually the receptacle for the marital share. But if the Deceased Spouse devised the entire marital share to the Surviving Spouse’s Trust, there will be no marital trust.
Qualified Disclaimer Trust A type of trust that allows for flexible tax planning through use of a disclaimer to a Credit Shelter Trust.
S Corporation Trust A revocable living trust continues to qualify as an S corporation shareholder following the settlor’s death for a period of time. A subtrust created on the death of the Deceased Spouse may not qualify it if contains certain testamentary trusts. When a pecuniary marital formula is used, there are rules for funding formulas that will not jeopardize the marital deduction.
Community Property with Right of Survivorship
If you are married and own a home in California, it may help to know about a law that allows married couples to take title to real property with both right of survivorship (and thus probate avoidance) while keeping the tax benefits of community property, namely the step-up in tax basis.
Types of Property Ownership
Prior to the advent of Community Property with Right of Survivorship, there were four standard methods of holding title in California: joint tenancy, tenancy in common, entity interest (partnership, trusts, business) and community interest of husband and wife. If, for example a husband wanted his interest in real property to pass automatically to his wife when he died, as opposed to passing through his Will, he and his wife might hold title as joint tenants. They would have created 50%-50% interests with “right of survivorship”. When the first spouse dies, the surviving spouse receives 100% of the property by filing an Affidavit with the County Recorder.
How is Community Property With Right of Survivorship Different From Joint Tenancy?
With joint tenancy, the half interest owned by the decedent does not get the “stepped-up tax basis” (the “step up” is a fair market valuation of the property made as of the date of death. The "step-up" is automatic and unlimited, except in year 2010). Thus, the decedent’s 50% interest retains its old, low basis and the person or persons receiving the property may have to pay capital gains taxes if the house has appreciated in value and it is later sold. With the new form of property ownership, the property receives the stepped up basis.
Benefits
Couples owning appreciated real estate as joint tenants may benefit from changing their form of title to Community Property with Right of Survivorship. However, be aware that it is only available to married couples, and as with any planning tool, there may be reasons why this method of passing on property isn’t for you. Also, due to changing tax laws, this and other estate planning devices may change with time.
If you have a living trust, you would not use this form of ownership, as your property would be owned by you as trustees of your Trust.