VESTING Flashcards
COMMUNITY PROPERTY
Property acquired by a husband or wife or both during marriage other than by gift, or as heir, legatee, or devisee, is considered to be jointly owned.
- Requires a valid marriage between two persons.
- Each spouse holds an undivided one-half interest in the estate.
- One spouse cannot partition the property by selling his/her interest.
- Requires signatures of both spouses to convey or encumber.
- Each spouse can devise (will) one-half of the community property.
- Upon death, the estate of the decedent must be “cleared” through probate, affidavit or adjudication.
- Both halves of the community property are entitled to a “Stepped up” tax basis as of the date of death.
STEP-UP IN BASIS, OR STEPPED UP BASIS
Is what happens when the price of an inherited asset on the date of the decedent’s death is above its original purchase price. The tax code allows for the raising of the cost basis to the higher price, minimizing the capital gains taxes owed if the asset is sold later.
The step-up in basis provision applies to financial assets like stocks, bonds and mutual funds as well as real estate and other tangible property. Of course, if the price of an asset has declined from that paid by the owner’s date of death, the asset’s cost basis would step down instead of stepping up for heirs.
For example, let’s suppose Jane purchases a share of stock at $2 and dies when its market price is $15. Had Jane sold the stock before dying at $15, she (or her estate after her death) would be liable for capital gains tax on a gain of $13.
Instead, her heir’s cost basis becomes $15 so that if the stock is later sold at that price no capital gains tax would be due. Capital gains tax that would have been due on the rise in the share price from $2 to $15 absent Jane’s death is never collected.
JOINT TENANCY W/ RIGHTS OF SURVIVORSHIP
A type of account that is owned by at least two people. In this arrangement, tenants have an equal right to the account’s assets. They are also afforded survivorship rights in the event of the death of another account holder.
- Parties do not need to be married; may be more than two joint tenants.
- Each joint tenant holds an equal and undived interest in the estate, unity of interest.
- One joint tenant can partition the property by selling his or her joint interest.
- Requires signatures of all joint tenants to convey or encumber the whole.
- Estate passes to surviving joint tenants outside of probate.
- No court action required to “clear” title upon the death of joint tenant(s).
- Deceased tenant’s share is entitled to a “stepped up” tax basis as of the date of death.-
COMMUNITY PROPERTY W/ RIGHT OF SURVIVORSHIP
Is co-ownership by married persons providing for the surviving spouse to retain full title after the death of the other spouse.
- Requires a valid marriage between two persons.
- Each spouse holds an undivided one-half interest in the estate.
- One joint tenant can partition the property by selling his/her joint interest.
- Requires signatures of both spouses to convey or encumber.
- Estate passes to surviving joint tenants outside of probate.
- No court action required to “clear” title upon the first death.
- Both halves of the community property are entitled to a “stepped up” tax basis as of the date of death.
TENANCY IN COMMON
With joint tenancy, the interest of the deceased owner is transferred to the other owner(s). On the other hand, with tenancy in common, the remaining owners do not have rights of survivorship. In other words, the ownership interest is passed on to the specified heirs of the deceased.
- Parties need not be married; may be more than two tenants in common.
- May have unequal shares and different ownership interests.
- Each tenant in common holds an undivided fractional interest in estate. Can be disproportionate. 20%-80% or 60%-40%
- Each tenant’s share can be conveyed, mortgaged or devised to a third party. All tenants have equal right to possession. The main problem with Tenants In Common is that the other tenant(s) can do whatever they want with their interest in the property. One of the co-owners could take out a loan on his/her interest in the property.
- Requires signatures of all tenants to convey or encumber the whole.
- Upon the death the tenant’s proportionate share passes to his/her heirs by will or intestacy.
- Upon death the estate of the decedent must be “cleared” through probate, affidavit or adjudication.
- Each share has its own tax basis.
