Category Archives: Taxes

TITLE CHOICES – REAL PROPERTY IN AZ

Arizona is a community property state so property acquired by a married couple is presumed to be community property unless legally specified otherwise. Title may be held as “sole and separate.” If a married person acquires title as sole and separate, his or her spouse must execute a disclaimer deed to avoid the presumption of community property. Parties may choose to hold title in the name of an entity, such as a corporation; limited liability company; a partnership, or a trust. Following are the most common examples of holding title.  How title is held has significant consequences so please consult a professional for further information.

COMMUNITY PROPERTY

Requires a valid marriage between two persons.

Each spouse holds an undivided one-half interest in the estate.

One spouse cannot partition (divide) the property by selling his or 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 go 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.

JOINT TENANCY WITH RIGHT OF SURVIVORSHIP

Parties need not be married; may be many joint tenants.

Each joint tenant holds an equal and undivided interest in the estate, unity of interest.

One joint tenant can partition (divide) the property by selling his or her 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 WITH RIGHT OF SURVIVORSHIP

Requires a valid marriage between two persons.

Each spouse holds an undivided one-half interest in the estate.

One spouse cannot partition (divide) the property by selling his or her interest.

Requires signatures of both spouses to convey or encumber.

Estate passes to the surviving spouse 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.

TENANCY IN COMMON

Parties need not be married; may be many tenants in common.

Each tenant in common holds an undivided fractional interest in the estate. Can be disproportionate, such as 20% and 80%; 60% and 40%; etc.

Each tenant’s share can be conveyed, encumbered (mortgaged) or devised (willed) to a third party.

Requires signatures of all tenants to convey or encumber the whole.

Upon death the tenant’s proportionate share passes to his or her heirs by will, trust or intestacy.

Upon death the decedent’s share must go through probate, affidavit or adjudication.

Each share has its own tax basis.

*Stepped up tax basis. Under this rule, an heir receives a basis in inherited property equal to its date-of-death value. If your uncle bought XYZ stock in 1940 for $500 and it’s worth $5 million at his death, the basis is stepped up to $5 million in the hands of his heirs and all of that gain escapes federal income tax forever.

This rule applies to inherited property that’s includible in the deceased’s gross estate and to property inherited from foreign persons who aren’t subject to U.S. estate tax. It also applies to the inherited portion of property owned by an inheriting taxpayer jointly with the deceased, but not the portion of jointly held property that the inheriting taxpayer owned before inheritance. This rule does not apply to reinvestments of estate assets by fiduciaries.

States With Estate Taxes

Nine states are making estate tax changes for 2017.  Altogether, eighteen states plus the District of Columbia impose either estate or inheritance taxes or both. They are Oregon, Washington state, Minnesota, Illinois, New Jersey, New York, Vermont, Hawaii, Kentucky, Nebraska, Iowa, Maryland, Pennsylvania, Connecticut, Massachusetts, Maine, Rhode Island, and Delaware.

As an example, New Jersey has had a long time $675,000 exemption from the state estate tax but now it will be $2 million dollars.  Similar changes are in effect for the other states.  Because the federal estate tax exemption amount is indexed to inflation, it rose from $5.45 million dollars for 2016 to $5.49 million dollars in 2017.  So, for a married couple the exemption amount is a little shy of $11 million dollars.

How much money you can leave to your heirs free of state tax levies depends on where you live and own property, whom you’re leaving your money to, and whether your estate planning is up to date.  Any doubt about this, please see an estate planning attorney for assistance.