Q: I still do not understand the difference between community property and joint tenancy. My wife, age 55, and I, age 70, hold our home as joint tenants, but our friends insist that we change it to community property. Should we? --A.D.
A: There are considerable advantages to holding your home and other assets as community property rather than as joint tenants. Although holding as joint tenants may avoid probate upon the death of one spouse, any savings in time and costs may be more than offset by the loss of the principal advantage of community property: a step-up in value for 100% of all marital assets to the decedent’s date of death. Assets held in joint tenancy receive that treatment only for the 50% held by the decedent.
What can this mean to you in dollars and cents? Let’s take the example of a house purchased decades ago for $25,000 and worth $400,000 upon the death of one spouse.
If the home were held as community property, its tax basis--the minimum level at which future capital gains tax calculations would have to start--would automatically be reset to $400,000, or $200,000 for each spouse. However, if the home had been held in joint tenancy, its tax basis would be set at $212,500--$200,000 for the decedent’s half and $12,500 for the surviving spouse’s share.
This makes a big difference when the surviving spouse wants to sell the house. If the home is sold for $400,000, no capital gains taxes would be owed if it had been held as community property. However, if it is held in joint tenancy, the survivor would owe taxes on a gain of $187,500, the difference between the sales price and the $212,500 tax basis.
Although it is easy enough to change the vesting of marital assets, couples not wishing to re-register their homes and other assets may simply want to append a simple note to their wills explaining that their intention is for their possessions, no matter how registered, to be considered community property.
The following statement was drafted by Marvin Goodson of the Los Angeles law firm of Goodson and Wachtel to handle such matters and we are reprinting it due to popular demand:
“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 file it with their wills. It does not have to be notarized. Goodson says this solution has been upheld by the Internal Revenue Service in Revenue Ruling 87-98.
An Ex-Spouse’s Claim to Social Security
Q: In a recent column, you discussed Social Security benefits available to ex-spouses. I am very concerned that my husband’s ex-wife can qualify for this and that she will get money that my husband and I are entitled to. Do I have to take her to court to prevent this? --A.C.
A: There is no need whatsoever to go to court. Benefits paid to an ex-spouse in no way reduce the amount available for the primary wage earner and his or her current spouse. The payments are entirely separate.
If your husband had been married three times before he married you, and each of those marriages had lasted a minimum of 10 years, then all three of his ex-wives would be eligible to apply for ex-spouse benefits on his account. However, even if all three ex-wives were drawing on his account, his benefits--as well as any you might be entitled to as his current spouse--would not be diminished by one penny.
Although such largess may strike you as excessive, and perhaps one of the causes of the drain on Social Security funds, the origins of the ex-spouse benefits rules are rooted in a deep concern for displaced homemakers. Prior to the enactment of the ex-spouse provisions, women who raised families rather than get jobs with Social Security benefits could be left without any coverage in their old age if they divorced late in life. This situation struck Congress as cruel, so ex-spouses were given benefits.
For a thorough discussion of this issue as well as others involving Social Security, you might want to read “Understanding Social Security,” a pamphlet published by the government. You may order it by calling (800) 772-1213.
Contribution Limits to Retirement Plans
Q: I am an employee of Los Angeles County and contribute to two retirement programs: a 457 plan and a 401(k). My combined contributions to these plans is limited to $7,500. I also have a second job with a private employer who also offers a 401(k) plan. May I also contribute an additional amount to that plan to bring my total contributions for the year up to the 401(k) limit? --J.D.
A: In a word: yes. The IRS allows taxpayers to participate in several tax deferred savings plans so long as the total amount of tax deferred savings does not exceed the ceiling, which is readjusted every year to account for inflation. The ceiling for 1992 is $8,728.