ESTATE PLANNING

FUNDING THE TRUST WITH COMMUNITY OR JOINT TENANCY PROPERTY

It is critical that the Settlors of a Family Trust properly fund the trust. The form of title of property going into the trust governs the character of the property for tax matters. The most common issue that comes up in the funding stage is the form of title on real property, usually the family home.

It is commonly believed that when a husband and wife hold property as joint tenants that the property is always presumed to be community property.  It is true that property acquired by spouses or partners during the marriage or domestic partnership as joint tenants is presumed to be community property (Fam C §2581) for the purpose of dividing property on dissolution of marriage or domestic partnership.  This presumption, which is rebuttable does not apply at death.

For tax matters, if the joint tenancy is a joint interest between spouses, only half the interest is included in the decedent's estate. IRC §2040(b). The basis adjustment is then limited to the decedent's one-half interest.

Both halves of property held by spouses as community property receive a step-up in basis at the death of the first spouse. The surviving spouse's half interest in the community property is regarded as property acquired from the decedent and is therefore eligible for the adjustment. IRC §1014(b)(6).

Civil Code §682.1 authorizes creation of community property with right of survivorship. The intent of this statute is to provide a form of title for real property that combines the benefits of both joint tenancy and community property.  All property transfers between spouses are exempt from reassessment.

I always recommend transferring real property into “community with right of survivorship” and then doing a second deed transferring the “community property” into the trust.