What Is A Community Property Agreement?

A Community Property Agreement also known as Spousal Property Agreement is an agreement which classifies all property held in joint tenancy by the spouses as community property with the exception of tax deferred assets. A community property agreement assures a step-up in basis on your appreciated assets.

Community Property Agreement

What Is A “Basis?”

A basis is the income tax valuation of inherited assets. The basis of an asset is the value of the asset on the date of death.

Why Is A Step-up In Basis Important?

When a beneficiary receives a step-up in basis, the value of an asset is determined to be the higher market value of the asset at the time of inheritance, not the value at which the original party purchased the asset. For example: If Uncle Sam leaves Ben a share of stock in ABC and the stock was selling for $250 per share at the time of Uncle Sam’s death, then that share is treated as if you had purchased it for $250 whenever you decide to sell it. The fact that Uncle Sam bought it for $50 per share in 1990 is disregarded for all future purposes.

So, Why Is A Community Property Agreement So Important?

If an asset is held in join tenancy, the asset gets half a step up in basis.

For example: Husband and Wife buy one share of stock in ABC as joint tenants for $100. Husband’s cost basis is $50 and Wife’s cost basis is $50. Husband dies and leaves his share to his Wife. Only the 1/2 portion inherited receives the step up in basis. Wife now has her old 1/2 share of the stock with a cost basis of $50 and Husband’s 1/2 share of the stock with a basis of $150 (its value on the date of Husband’s death). Wife’s total basis is $200. If she decides to sell the stock for $300, her taxable profit is $100.

For Example: (same example as before, except the asset is held as community property). Husband and wife one share of stock in ABC as community property for $100. Husband dies and leaves his share to his Wife. Wife now has a step up in basis of $300 (value of the stock on the date of Husband’s death). If she decides to sell the stock for $300, her taxable profit is $0. She will not have to pay taxes.e different if the asset is held as community property. If a asset is held as community property, the asset gets a full step-up in basis.

A comprehensive estate plan should implement not only your wishes but also consist of different estate planning tools, such as a community property agreement, to help save your loved ones taxes. If you have questions regarding community property agreements and how they can benefit you, please contact us at 818-649-9110 or email us at info@bazikyanlaw.com for a free consultation. Our Sherman Oaks and Glendale attorneys are well trained in properly managing community or spousal property agreements.