Using Joint Tenancy in a Will to Avoid Probate
Q: Many months ago, your column carried an item stating that married couples in community property states could write a simple addendum to their wills noting that they wanted any property held in joint tenancy to be treated as community property upon the death of one spouse. Could you reprint that wording? --E. H. H.
A: Yes, and let me preface it by saying that lawyers are increasingly recommending that married couples in community property states, such as California, use such statements to take advantage of the best of both the joint tenancy and community property systems of holding property. Remember, under joint tenancy the probate process is avoided, while community property vesting allows a “step up” in value for the property share held by the surviving spouse.
The following statement was drafted by Marvin Goodson of the Los Angeles law firm of Goodson and Wachtel: “We hereby agree that all of the property we hold in joint tenancy is truly and completely community property and we are holding it in joint tenancy for convenience only. We do not intend to change the character of the ownership of the property by holding it in joint tenancy.” Goodson recommends that married couples sign and date the statement, preferably before a witness, and then file it with their wills. It need not be notarized. Goodson says this solution has been upheld by the Internal Revenue Service in Revenue Ruling 87-98.
How to Calculate Home’s Taxable Basis
Q: I married in 1974 and moved into my husband’s home which he had purchased in the early 1950s. In 1985, my name was added to the deed and we held the home as joint tenants. He died recently, leaving me as sole owner of the home, and I am now thinking of selling it. What taxable basis should I use when figuring my capital gain on the sale? Also, was my property tax assessment affected in any way by inheriting the house? --J. L. S.
A: To figure your taxable basis in the house, mentally divide the house in two; half is yours, the other your husband’s. Each half will have a separate taxable basis: your husband’s is 50% of the home’s value on his date of death; yours is 50% of your husband’s original tax basis in the house. Add the two figures together and you have the final tax basis of the house.
Let’s say that your husband bought the house for $20,000 in the early 1950s and that amount was his original tax basis in the property. And let’s say that it was worth $200,000 when he died in 1985. His tax basis would be half of its value on his date of death, or $100,000. Your tax basis would be half of the original basis, or $10,000. Your total taxable basis is $110,000.
If your net sales price today, after paying commissions and other expenses, were $250,000, your taxable gain would be $250,000 minus $110,000, or $140,000.
By the way, using these figures, your taxable basis would have been $200,000 if you had held the house as community property. Under U.S. tax law, widows and widowers are entitled to an automatic “step up” in the value of their half of community property upon the death of their spouse.
In this case, your half of the house would also have been valued as of the date of your husband’s death. And yes, even though your husband bought the house prior to your marriage, the law allows you, upon mutual consent, to consider it community property.
Finally, transfers of property between spouses are entirely exempt from reassessment for property tax purposes.
Formula Can Help Figure Your Pension
Q: How can I estimate my annual contribution to a pension plan? I am 55 years old and I want to receive $60,000 per year when I retire in 10 years. Further, I project my life expectancy at 75 years. Is there any mathematical formula I can use? --A. T. G.
A: Yes, there is a mathematical formula, and a qualified pension planner or financial planner can explain it to you, make the necessary calculations and even help you establish your pension fund, says Morrie Reiff of Planned Asset Management in Encino. We can assume that you are self-employed. But do you have employees? That can make a big difference. Did you know there are two types of pension plans you can establish on a tax-deferred basis because you are self-employed? They are known as “defined benefit” and “defined contribution.”
The latter is characterized by how much you want to contribute, on a tax-deferred basis, to the plan each year, the former by how much you want to take out each year during your retirement. Deposits into defined contribution plans are limited by statute: the lesser of $30,000 or 20% of your business’ net annual income.
Perhaps you did know of the difference, because you said you wanted to receive $60,000 annually upon retirement and you wanted to accumulate this nest egg through tax-deferred contributions in just 10 years. But did you know that if you have employees, you must include them in your defined-benefit plan as well? That could prove prohibitive given the amount you want to build up for yourself.
Furthermore, the duration of a defined-benefit plan is determined by actuarial standards. You cannot simply make your own life expectancy projections. Nor can you administer your own defined-benefit plan. You must hire a pension administrator to handle the necessary paperwork. So as you can see, there is no escaping the hiring of a professional to handle this all-important task.
But what if you didn’t want all the headache of a government-regulated, tax-deferred pension fund? What if you were willing to forgo the obvious advantage of using tax-deferred funds for your pension fund and simply opened a retirement account with your after-tax money? How much would you have to contribute for 10 years to take out $60,000 for the next 10 years? Reiff, the Encino financial planner, made that calculation for us; the answer is $30,500.96. Reiff explains that if you put that amount into an annuity each year for 10 years and allowed it to grow at a 7% annual tax-deferred interest rate, you could withdraw $60,000 each year for the following 10 years.
