As an attorney I gets asked this question all the time. For most couples the answer is either Community Property with Right of Survivorship or in a Trust.
Below are the first 3 questions.
Q 1. What is “community property with right of survivorship”?
A It is a form of taking title to jointly-owned property, available to a husband and wife (or registered domestic partners), combining the benefits of holding title as community property and the benefits of joint tenancy. As discussed below, it primarily impacts estate planning and tax treatment.
Q 2. What does this form of taking title mean?
A Previously, a husband and wife could hold title to jointly-owned property in several different forms: as community property, as joint tenants, or as tenants in common. Domestic partners could hold title as joint tenants or tenants in common. Each of these forms of holding title has distinct benefits relating to estate planning upon the death of one of the spouses or domestic partners. Holding title as community property provides a “stepped-up” tax basis for both halves of the property upon the death of the first spouse or domestic partner, but no automatic transfer of title. Holding title as joint tenants provides for the immediate and automatic transfer of title to the surviving spouse (domestic partner) upon the death of the first spouse (domestic partner), but only the decedent’s portion of the property receives a step up in basis. Now, a husband and wife or registered domestic partners can enjoy both benefits by taking title as community property with right of survivorship.
Q 3. What does a “stepped-up basis” mean?
A Under both federal and California law, when a person receives property from a decedent, the tax basis for that property is the fair market value of the property on the date of the decedent’s death. For example, you just inherited property from your aunt that she purchased in 1970 for $25,000. Today the property is worth $250,000. Your tax basis in the property is $250,000 and not the $25,000 that your aunt originally paid for the property. When you dispose of property,your gain is the difference between your basis in the property and the sales price. Accordingly, the “stepped-up” basis is very important in calculating your capital gains when you ultimately dispose of the property.
Q 4. How is the “stepped-up basis” applied to property held as joint tenants?
A When two people own property as joint tenants, because the surviving joint tenant already owns one half of the property, the surviving joint tenant only receives a “stepped-up” basis on one half of the property. For example, a husband and wife hold property they purchased for $10,000 as joint tenants that is now worth $200,000. Each has an original basis of $5,000 in their one half of the property.When one spouse dies, the other spouse receives a step up in basis on the one half of the property formerly owned by the deceased spouse. One half of the property would have a basis of $100,000 (the “stepped-up” basis) and one half of the property would have a basis of $5,000 (the original purchase basis).
Q 5. How is the “stepped-up basis” applied to property held as community property?