Estate planning: Handling of separate property in Community Prop State (CA)

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bbrock
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Estate planning: Handling of separate property in Community Prop State (CA)

Post by bbrock »

Hi. We are prepping for our estate planning session in order to create a trust, etc. Live in CA. Prior to marriage in 2009, I owned assets that I brought into the marriage such as 1) my individual account at Vanguard (now an individual brokerage account), 2) half of a cabin with my brother (titled as tenants in common). I'd like this property to remain separate in order for it to achieve the full step up in basis upon my death and transfer to my wife.
Is this possible? How do is it accomplished?

Would there be a better idea for tax purposes?
bbrock
SuzBanyan
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by SuzBanyan »

Just so you know, there is a full step up in basis on the death of the first spouse to die for assets held as community property. If your goal is to transfer you assets to your wife with a full step up in basis after your death, there is no need to keep it as your separate property. However, there are certainly other reasons to keep property as separate property.
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bbrock
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by bbrock »

Wait a sec. Then, was I thinking about this incorrectly? I thought by keeping my Vanguard acct. as separate property, or the half of my share of the property owned with my brother, then she'd get a step-up in basis in my full account and/or share of the property. Ultimately what I am trying to achieve is the best tax ramifications for our kids. If this can still be achieved by listing her on my individual account, and she'd get a step-up in my half of it, and would be fine on her half, then great.

Looking at my separate Vanguard taxable brokerage account, I am trying to minimize her future taxes/gains b/c my letter of instruction would be for her to sell all holdings and put everything into either Vanguard Vanguard LifeStrategy Moderate Growth, Balanced Index, or Tax Managed Balanced. This is not to open a can of worms about the most appropriate fund for a taxable account; there could be a lot worse selections, and for simplicity, any of these funds work fine.
Last edited by bbrock on Sun May 02, 2021 9:23 pm, edited 2 times in total.
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Big Dog
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by Big Dog »

you could transfer the brokerage account to a community property account and it will automatically be stepped-up upon death.
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bbrock
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by bbrock »

Thanks.

The full account Big Dog? Upon my death, with the deep imbedded gains, is all that zeroed out in essence?
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Big Dog
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by Big Dog »

bbrock wrote: Sun May 02, 2021 9:20 pm Thanks.

The full account Big Dog? Upon my death, with the deep imbedded gains, is all that zeroed out in essence?
Yes, but I believe that it requires a spousal property agreement (transmutation agreement) that indicates that you declare your previous separate property (brokerage account) as community property. Not a lawyer, but think this is also doable via wills and trusts. Dunno if this will also work for your half of the cabin. But if you are going into an estate planning session, the attorney should know since this is pretty basic.

https://leginfo.legislature.ca.gov/face ... ionNum=852.
Luckywon
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by Luckywon »

There is no step up advantage to keeping property separate rather than community property within a marriage in California.

For separate property, there is a step up if the spouse that owns that property dies. But there is no step up of the surviving spouse's property upon the death of a spouse.

However, there is a potential advantage to making separate property community property, in that there is a full step up upon the death of either spouse. And another step up upon the death of the second spouse.

OP, in your case, if you kept your property separate, and you died first, your wife would get a cost basis step up upon inheriting from you. Her beneficiaries would get another step up upon her death. If your wife died first, you would get no step up upon her death, but your heirs would get a step up upon your death.

If you made your assets community property, your wife would get a cost basis step up upon inheriting from you. Her beneficiaries would get another step up upon her death. If your wife died first, you would get a step up upon her death, and your heirs would get another step up upon your death. So that is where there is a potential tax advantage to making your property community property-the scenario where your wife predeceases you.

Note that if the asset is not sold before the death of the 2nd spouse, there is no difference to the heirs of the second to die spouse, as there is a step up upon the death of the 2nd spouse regardless of how it was held before the death of the first spouse.

With respect to brokerage accounts, it is not necessary to prepare a spousal property agreement to transmute separate property into community property. At least at Schwab and Etrade, holdings can be transferred from an individual account or Living Trust to a community property account. Once transferred, stepped up cost basis will be recorded by the brokerage upon death of first spouse. Holdings may also be transferred from an individual account or Living Trust to a JTWROS account and they will receive a step up upon death of the first spouse, though it is not automatic but must be requested. I was told that the step up is recorded upon presentation of death certificate and proof of marriage.

Even if the brokerage does not record a cost basis step up, you may claim a step up upon sale of a security by adjusting the cost basis on your tax return the year that the asset is sold. You need proof that the asset was community property. If the asset was purchased with marital funds or you have documented that the asset was transmuted to community property that may be sufficient.
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by HueyLD »

bbrock wrote: Sun May 02, 2021 7:48 pm Hi. We are prepping for our estate planning session in order to create a trust, etc. Live in CA. Prior to marriage in 2009, I owned assets that I brought into the marriage such as 1) my individual account at Vanguard (now an individual brokerage account), 2) half of a cabin with my brother (titled as tenants in common). I'd like this property to remain separate in order for it to achieve the full step up in basis upon my death and transfer to my wife.
Is this possible? How do is it accomplished?

Would there be a better idea for tax purposes?
If you have children from prior relationships and you want your separate properties to go to such children, it is best to keep the separate properties “separate.”
quantAndHold
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by quantAndHold »

You’re about to do a trust, right? Answering these kind of questions are exactly what you’re paying the attorney for. I would trust the answers your own attorney gives before a bunch of strangers on the internet.

When we did our trust, the attorney explained everything that was relevant to our situation, wrote the trust, and gave us a cheat sheet about how to retitle everything to put it into our trust. We have both separate property and community property in the trust.
Yes, I’m really that pedantic.
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HueyLD
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by HueyLD »

quantAndHold wrote: Mon May 03, 2021 9:15 am You’re about to do a trust, right? Answering these kind of questions are exactly what you’re paying the attorney for. I would trust the answers your own attorney gives before a bunch of strangers on the internet.

When we did our trust, the attorney explained everything that was relevant to our situation, wrote the trust, and gave us a cheat sheet about how to retitle everything to put it into our trust. We have both separate property and community property in the trust.
Very good advice. +1!
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bbrock
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by bbrock »

Thanks for all the replies.

QuantandHold, yes we are preparing to meet with attorney. I am trying to explore and understand topics ahead of time. Key word being "preparing." Why not learn more ahead of time regarding questions I have?

Luckywon, thanks for the well-explained post. I'll call Vanguard and inquire how one retitles a separate brokerage account to a community property account. Now I understand the major benefit of my brokerage account being community property in that upon my wife's death, there would be a step-up in basis. I had overlooked that.
bbrock
Luckywon
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by Luckywon »

bbrock wrote: Mon May 03, 2021 11:00 am Thanks for all the replies.

QuantandHold, yes we are preparing to meet with attorney. I am trying to explore and understand topics ahead of time. Key word being "preparing." Why not learn more ahead of time regarding questions I have?

Luckywon, thanks for the well-explained post. I'll call Vanguard and inquire how one retitles a separate brokerage account to a community property account. Now I understand the major benefit of my brokerage account being community property in that upon my wife's death, there would be a step-up in basis. I had overlooked that.
You are doing the right thing by preparing. I wish estate planning was as simple as making an appointment with a trust and estates attorney but unfortunately in my experience it really is not.

We had estate plans prepared by a partner in the trust and estates section of a highly regarded (and expensive) firm. From reading on this forum and asking questions (bsteiner was kind enough to weigh in) and further research of my own, I confirmed there was a shocking and potentially very costly deficiency in our Trusts. We hired another attorney to fix things. Thank goodness no harm done and a good lesson learned.

Further, from conversations with friends and family who have had estate plans prepared, it is clear to me that most of them have not made informed decisions with regard to their estate plans, and do not really understand critical aspects of their plans. I think what happens frequently is some combination of:

-They are overwhelmed by the information and options presented to them and do not understand it.
-Their attorney is focused on getting something executed rather than really spending the time to educate the client. And the client does not know enough to know what questions to ask.
-Their estate planning needs are beyond the ken of their attorney, and again, the client does not know enough to realize it.

Also relevant to this thread, i.e. the handling of separate and community property in a marriage, we had a prenuptial agreement drafted and spoke with several attorneys during the process. Our questions regarding the tax implications of separate vs community property were really not fully answered by any of them. It was only by researching online myself and actually speaking with the estate departments at our various brokerages that I fully understood our options and how to put what we want in place.

Of course one should trust their attorney over a random person on the internet. (That is especially true with respect to the subject of prenuptial agreements where after consultation with attorneys we realize that much of what is said on this topic right in this forum is mythology.) My point is that with respect to estate planning (as with most important matters), diligently acquiring and confirming information from multiple sources is most likely to have a good outcome.
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by Ranunculus »

Luckywon wrote: Mon May 03, 2021 11:28 am
bbrock wrote: Mon May 03, 2021 11:00 am Thanks for all the replies.

QuantandHold, yes we are preparing to meet with attorney. I am trying to explore and understand topics ahead of time. Key word being "preparing." Why not learn more ahead of time regarding questions I have?

Luckywon, thanks for the well-explained post. I'll call Vanguard and inquire how one retitles a separate brokerage account to a community property account. Now I understand the major benefit of my brokerage account being community property in that upon my wife's death, there would be a step-up in basis. I had overlooked that.
You are doing the right thing by preparing. I wish estate planning was as simple as making an appointment with a trust and estates attorney but unfortunately, in my experience it really is not.

We had estate plans prepared by a partner in the trust and estates section of a highly regarded (and expensive) firm. From reading on this forum and asking questions (bsteiner was kind enough to weigh in) and further research of my own, I confirmed there was a shocking and potentially very costly deficiency in our Trusts. We hired another attorney to fix things. Thank goodness no harm done and a good lesson learned.

Further, from conversations with friends and family who have had estate plans prepared, it is clear to me that most of them have not made informed decisions with regard to their estate plans, and do not really understand critical aspects of their plans. I think what happens frequently is some combination of:

-They are overwhelmed by the information and options presented to them and do not understand it.
-Their attorney is focused on getting something executed rather than really spending the time to educate the client. And the client does not know enough to know what questions to ask.
-Their estate planning needs are beyond the ken of their attorney, and again, the client does not know enough to realize it.

Also relevant to this thread, i.e. the handling of separate and community property in a marriage, we had a prenuptial agreement drafted and spoke with several attorneys during the process. Our questions regarding the tax implications of separate vs community property were really not fully answered by any of them. It was only by researching online myself and actually speaking with the estate departments at our various brokerages that I fully understood our options and how to put what we want in place.

Of course one should trust their attorney over a random person on the internet. (That is especially true with respect to the subject of prenuptial agreements where after consultation with attorneys we realize that much of what is said on this topic right in this forum is mythology.) My point is that with respect to estate planning (as with most important matters), diligently acquiring and confirming information from multiple sources is most likely to have a good outcome.
I had the same experience with our trust prepared by a partner in a firm specializing in trusts and estates. They suggested we name an irrevocable trust as beneficiary of retirement accounts without even mentioning the tax consequences of such a move.
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by Luckywon »

bbrock wrote: Mon May 03, 2021 11:00 am
Luckywon, thanks for the well-explained post. I'll call Vanguard and inquire how one retitles a separate brokerage account to a community property account. Now I understand the major benefit of my brokerage account being community property in that upon my wife's death, there would be a step-up in basis. I had overlooked that.
If you decide to make some brokerage holdings community property, be aware that not all community property titled accounts are alike with respect to probate implications.

I was told by Etrade that their community property accounts do not have "right of survivorship." Specifically, while the surviving spouse will receive the assets, Etrade will require an order from a probate court before distributing them. It is not possible to designate ROS in a community property account at Etrade. Therefore, Etrade recommended to me that I title our account JTWROS. This has the advantage of the assets passing to the surviving spouse without probate.

At Schwab, it is possible for a community property account to have ROS, although that is not the default and requires special processing. Unless you specifically ask and put ROS in place, if you have a community property account at Schwab, probate may be required before the assets are distributed to a surviving spouse. Ultimately, it was recommended to me by Schwab that for our purposes, it was better to title our account community property and we went through the additional step of making sure right of survivorship was assigned, as cost basis step up was more automatic in this design than for JTWROS titled accounts.

I do not know how Vanguard handles distribution of property to the surviving spouse in their community property accounts, i.e. whether probate would be needed.
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bbrock
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by bbrock »

Just found this post when I searched "how to retitle vanguard brokerage account to community property" viewtopic.php?t=333266

I see detailed post from Kookaburra and Mogg that explain the process. Since we are creating a trust, and I intend to retitle my separate account, I'd have to ask the attorney how to proceed - i.e. change ownership from separate to CPWROS, and then complete the paperwork to transfer into trust. Or, is there a different way to accomplish this?

+1 on what you last posted Luckywon to learn as much as possible prior to the fact of the creation of the trust in order to know what to look for and/or to ask. This is uncharted territory and it would surely be sad if the documents/trust that will be created were missing a key thing or had an error.
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bbrock
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by bbrock »

Of phone with Vanguard. Learned that I would use form "Change of Ownership between existing Vanguard Nonretirement Accounts" to re-title. https://personal.vanguard.com/web/c1/ne ... bapp/forms

But, when asked if Vanguard recognizes CPWROS on a brokerage account, rep told me no. They recognize JTWROS or joint tenants community property. He stated that if the account is labeled as JTWROS, a form could be filled out after the death of the first tenant which would allow the full step up of the account. I asked could this form be on file first, he replied no it is a form to complete after the fact. Anyone heard of having to do this vs. getting an account titled as community property?
bbrock
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bbrock
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by bbrock »

I was exploring at Vanguard using the open new account link to check what are even the options. The following populated:

Use this process to open an individual, a joint, an UGMA/UTMA, or a guardian nonretirement brokerage account to invest in Vanguard mutual funds, ETFs (exchange-traded funds), and other securities. To be eligible for a new account, you must provide and maintain a legal U.S. address.

To avoid delays in establishing your account, be sure to include all required documentation.
What type of account would you like to open? *
-Individual
-Joint
-Uniform Gifts to Minors Act/Uniform Transfers to Minors Act (UGMA/UTMA)
-Guardian

Registration type *
-Tenants with right of survivorship.
-Tenants by the entirety with right of survivorship.
-Community property or marital property.
-Tenants in common.
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Luckywon
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by Luckywon »

bbrock wrote: Mon May 03, 2021 12:07 pm Just found this post when I searched "how to retitle vanguard brokerage account to community property" viewtopic.php?t=333266

I see detailed post from Kookaburra and Mogg that explain the process. Since we are creating a trust, and I intend to retitle my separate account, I'd have to ask the attorney how to proceed - i.e. change ownership from separate to CPWROS, and then complete the paperwork to transfer into trust. Or, is there a different way to accomplish this?

+1 on what you last posted Luckywon to learn as much as possible prior to the fact of the creation of the trust in order to know what to look for and/or to ask. This is uncharted territory and it would surely be sad if the documents/trust that will be created were missing a key thing or had an error.
I'd suggest waiting until your Trust has been executed, and then retitling your individual account to the Trust. I don't see any reason for the intermediate step of retitling the account CPWROS before retitling it to the trust, if you are anticipate the trust will be established soon. Certainly I'd ask your attorney for instructions on how to accomplish this.
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bbrock
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by bbrock »

Got it. Thanks.
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by bbrock »

Preliminary meeting with estate attorney completed. Discussed my separate property (i.e. my share of cabin, Vanguard Brokerage account). She confirmed that using a transmutation agreement would complete the transference of this property to be community property to satisfy code 1014(b)6(6). She just stated that I'd need a separate attorney to "sign-off" on it to show that he/she advised me that I'd be giving up my separate property rights, etc.
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by Big Dog »

With respect to brokerage accounts, it is not necessary to prepare a spousal property agreement to transmute separate property into community property. At least at Schwab and Etrade, holdings can be transferred from an individual account or Living Trust to a community property account.
That's probably true at Vanguard too, but technically not quite correct. By law, community property applies to assets that the couple acquires during marriage. Stuff brought to the marriage can still be owned separately by the individual spouse.
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by stan1 »

bbrock wrote: Fri May 07, 2021 6:12 pm Preliminary meeting with estate attorney completed. Discussed my separate property (i.e. my share of cabin, Vanguard Brokerage account). She confirmed that using a transmutation agreement would complete the transference of this property to be community property to satisfy code 1014(b)6(6). She just stated that I'd need a separate attorney to "sign-off" on it to show that he/she advised me that I'd be giving up my separate property rights, etc.
Yep, you don't want to do it if there's even the slightest chance of divorce. Especially if the separate property has a high value or in the case of the cabin if you would not want to sell it and would have to find cash to buy out soon to be ex's half of your share.
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by Luckywon »

Big Dog wrote: Fri May 07, 2021 8:35 pm
With respect to brokerage accounts, it is not necessary to prepare a spousal property agreement to transmute separate property into community property. At least at Schwab and Etrade, holdings can be transferred from an individual account or Living Trust to a community property account.
That's probably true at Vanguard too, but technically not quite correct. By law, community property applies to assets that the couple acquires during marriage. Stuff brought to the marriage can still be owned separately by the individual spouse.
I'm not following..could you elaborate on what is technically not quite correct? Nothing in what you stated seems to contradict it.
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by Big Dog »

Luckywon wrote: Fri May 07, 2021 8:46 pm
Big Dog wrote: Fri May 07, 2021 8:35 pm
With respect to brokerage accounts, it is not necessary to prepare a spousal property agreement to transmute separate property into community property. At least at Schwab and Etrade, holdings can be transferred from an individual account or Living Trust to a community property account.
That's probably true at Vanguard too, but technically not quite correct. By law, community property applies to assets that the couple acquires during marriage. Stuff brought to the marriage can still be owned separately by the individual spouse.
I'm not following..could you elaborate on what is technically not quite correct? Nothing in what you stated seems to contradict it.
"Vanguard won't assume responsibility for determining whether your account is subject to community property." In other words, you can title your assets with them however you like, and they will assume what you are doing is correct. In other words, they'll take your word that the community property that you put into the CM account meets the legal definition of community property. But as your attorney noted, completing a transmutation agreement for property you had before marriage to make it clear to the IRS and state that your intent is that it is all CM. (This can sometimes also be accomplished via a prenup.)
Last edited by Big Dog on Fri May 07, 2021 9:07 pm, edited 1 time in total.
Luckywon
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Re: Estate planning: Handling of separate property in Community Prop State (CA)

Post by Luckywon »

bbrock wrote: Fri May 07, 2021 6:12 pm Preliminary meeting with estate attorney completed. Discussed my separate property (i.e. my share of cabin, Vanguard Brokerage account). She confirmed that using a transmutation agreement would complete the transference of this property to be community property to satisfy code 1014(b)6(6). She just stated that I'd need a separate attorney to "sign-off" on it to show that he/she advised me that I'd be giving up my separate property rights, etc.
Curious-with respect to the Vanguard brokerage account holdings, did she advise preparing a transmutation agreement in lieu of, or in addition to, transferring the holdings to a community or joint titled account?

My working assumption was that the utility of a transmutation agreement would be to assert that assets that remained titled individually or had no title were actually community property.

What my attorney advised was that to transmute individually held brokerage holdings we could just transfer the holdings to a joint or community property account. Our prenuptial agreement specifically states that any jointly established accounts are deemed community property, so perhaps that explains that advice, if it varies from the advice given by your attorney.

I have confirmed with Schwab and Etrade is that they will record a cost basis step up upon death of either spouse for any holdings in a joint or community property account, and I have successfully transferred funds from my separately held living trust accounts to our joint accounts at both of these brokerages. So at Schwab and Etrade a transmutation agreement does not seem necessary at least from the aspect of whether individually held property can actually be transferred to the joint account and qualify for recording of the step up by the brokerage. Whether the IRS could audit this and challenge whether it was truly community property is another question, I suppose. Seems rather unlikely to me though and I would assume as spouses may gift assets to each other without tax consequence that transferring money to a joint account would be evidence of a gift, but I am certainly not an expert in this area.
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