New kid on the title block.

• Author: Leonard, Robert T.
• Position: Estate Planning

A new title option for married couples, known as community property with right of survivorship (CPWROS), is intended as a "best of both worlds" hybrid between community property titling (CP) and joint tenancy with right of survivorship (JTWROS). CPWROS was created so a married couple could avoid probate on jointly held assets and to achieve the same basis benefits as traditional community property.

But does this new title deliver what it promises? The answer may be less obvious than practitioners and clients would like.

A GOOD THEORY

CPWROS sounds like a great solution to a common problem. California couples shun community property titling to avoid probate. But by opting for JTWROS they lose the advantages of CF titling. Under IRC Sec. 1014(b)(1) and (6), community property titling allows the survivor to claim a fair-market value date of death basis for the decedent's half interest and the surviving spouse's half interest. In other words, CP titling provides the survivor a new fair-market value date of death basis for the entire property.

By contrast, joint tenancy provides the surviving joint tenant with a date of death value basis only for the decedent's half interest in the jointly owned property.

One solution to this dilemma has been for couples to take title as joint tenants with right of survivorship, but then have an acknowledgment--usually inside a trust or will--stating their intention that the property remain a community" asset, regardless of the form of title.

The IRS approved such arrangements in Rev. Rul. 87-98, confirming that property that is OP for purposes of state law qualifies for community property's two-part basis step-up (the decedent's and the survivor's interests), even though it's held in a common law estate like joint tenancy.

Community property with right of survivorship would seem like a way for married couples to ensure an easy transfer to the surviving spouse at death without probate. And since assets are a type of community property, the surviving spouse should be able to claim a date-of-death basis step-up for both interests.

Or so the argument goes.

THE MYSTERY BEGINS

Our puzzle begins with the threshold issue of estate includibility. For both JTWROS and the non-survivorship version of community property, the basis step-ups allowed under IRC Sec. 1014(b)(1) and (6) have one important condition: the decedent's half interest must be includible in his gross estate. And for both JTWROS and traditional community...