Taxes and Joint Brokerage in Common Law State

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NYCaviator
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Taxes and Joint Brokerage in Common Law State

Post by NYCaviator » Tue Jun 30, 2020 8:16 pm

I read enough on here to understand that there is a difference between a "common law" and "community property" state. I live in a "common law" state. Is there any reason that my spouse and I should have separate brokerages, rather than one joint brokerage? From what I have read on here, my understanding is that there are tax advantages to having separate accounts in community property states with step up basis at death. Is this also true in common law states? Any other advantages to having separate?

Jack FFR1846
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Re: Taxes and Joint Brokerage in Common Law State

Post by Jack FFR1846 » Tue Jun 30, 2020 8:54 pm

Can you explain what a "Common Law State" is? I'm confused and google only brings us sites explaining common law marriage, which Steve Lehto did a good video about. My first thought was that you were talking about laws derived from Common English Law, but somehow I don't think so because that's all the states but Louisiana, as far as I know.
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123
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Re: Taxes and Joint Brokerage in Common Law State

Post by 123 » Tue Jun 30, 2020 10:28 pm

A "common law" state is often used to describe a state that allows a legally binding marriage to be established without a public or religious ceremony that essentially makes it clear that the two individuals are a married couple. A public or religious ceremenony generally involves a public record of the marriage. A marriage license is generally obtained before the marriage ceremony and a record is filed with civil authorities after the ceremony that the two individuals were united by a marriage. There is a public record of the marriage.

The establishment of a "common law" marriage is done by the actions of the parties in the marriage. There are often court proceedings in some jurisdictions to establish whether or not a common law marriage was established, it can get complicated when one member of the "couple" becomes deceased.

A frequent problem with "common law" marriages is that there is no "common law" divorce. Divorce required an action by a state/county court.

A couple that has a valid "common law" marriage (originated in a state where they are permissable) is treated the same by the law as a couple that has a ceremonial marriage.

A problem with common law marriages is that if there is no divorce it can be an impediment to a subsequent marriage, either common law or ceremonial.

Different states can treat the "step up" of assets in a marriage that ends in a death differently.
Last edited by 123 on Tue Jun 30, 2020 10:34 pm, edited 1 time in total.
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lazynovice
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Re: Taxes and Joint Brokerage in Common Law State

Post by lazynovice » Tue Jun 30, 2020 10:32 pm

OP- Is it safe to say you mean non-community property state with respect to your question?

With respect to a step up in basis at death, here is a link to the wiki on that:

https://www.bogleheads.org/wiki/Step-up_in_basis

We have lived in a community property state and a common law state. Our attorney advised us to keep the community property assets separate so that we could cleanly track which assets have the special stepped up basis on those assets. It is a joint account.

For the assets from the common law states, we still have a joint account. When one of us dies, only half that account gets the step up in basis. In the case of separate assets, the whole account gets a step up in basis. I suppose if one account is likely to be much larger than the other and you know that spouse will die first, then having them titled separately would get you a larger amount stepped up than half.

Different states may have different treatment as well. If you are talking about a lot of money, a lawyer is worth the money. We thought so anyway.

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Re: Taxes and Joint Brokerage in Common Law State

Post by NYCaviator » Wed Jul 01, 2020 7:31 am

lazynovice wrote:
Tue Jun 30, 2020 10:32 pm
OP- Is it safe to say you mean non-community property state with respect to your question?

With respect to a step up in basis at death, here is a link to the wiki on that:

https://www.bogleheads.org/wiki/Step-up_in_basis

We have lived in a community property state and a common law state. Our attorney advised us to keep the community property assets separate so that we could cleanly track which assets have the special stepped up basis on those assets. It is a joint account.

For the assets from the common law states, we still have a joint account. When one of us dies, only half that account gets the step up in basis. In the case of separate assets, the whole account gets a step up in basis. I suppose if one account is likely to be much larger than the other and you know that spouse will die first, then having them titled separately would get you a larger amount stepped up than half.

Different states may have different treatment as well. If you are talking about a lot of money, a lawyer is worth the money. We thought so anyway.
This is what I meant, thanks for clarifying. All assets are from a “non community property state” or what I called a “common law” state. The majority of the money would be in one of the accounts if we had separate.

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