Schwab "joint account" vs. community property

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ilan1h
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Schwab "joint account" vs. community property

Post by ilan1h »

I recently became aware that one of the few financial advantages of living in California was that it was a community property state and that a surviving spouse would get a 100% step up in basis on equities. However, I noticed that my Schwab account is titled "Joint tenancy with transfer of death beneficiaries". I'm not sure why it's titled this way but was wondering if I should change it to a different designation eg: "Community property with rights of survivorship". My Vanguard account doesn't have my wife's name listed at all even though she is designated as the Transfer of Death 100% beneficiary. Perhaps this designation should also be changed? I'm surprised by the lassitude of all of this since I constantly transfer assets between my Vanguard and Schwab accounts and never even gave a second thought to these issue. However, recently I began doing estate planning and began to realize that perhaps I should fix these issues.
123
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Re: Schwab "joint account" vs. community property

Post by 123 »

I've observed that different banks and brokerages use different ways of titling accounts. Likely they have some company standards that simply differ. I think it's a ways of giving company support staff (and customer service) a heads-up about the account without them having to dig through other account profile/feature parameters. (Or maybe their systems don't have an easy way of incorporating some information so they incorporate it into the account title.)
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Topic Author
ilan1h
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Re: Schwab "joint account" vs. community property

Post by ilan1h »

I don't think it's quite that simple. There is a big difference in the way that basis is handled depending on how the account is titled. My understanding is that if it's not titled correctly you may miss out on the double step up in basis that occurs in community property states. I will check directly with the institutions about this.
MrBeaver
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Re: Schwab "joint account" vs. community property

Post by MrBeaver »

I did a similar change at Vanguard (different community property state) a few years ago. It required setting up a new brokerage account as there was no way they could modify the existing account.
Luckywon
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Re: Schwab "joint account" vs. community property

Post by Luckywon »

ilan1h wrote: Mon Nov 02, 2020 12:23 am I recently became aware that one of the few financial advantages of living in California was that it was a community property state and that a surviving spouse would get a 100% step up in basis on equities. However, I noticed that my Schwab account is titled "Joint tenancy with transfer of death beneficiaries". I'm not sure why it's titled this way but was wondering if I should change it to a different designation eg: "Community property with rights of survivorship". My Vanguard account doesn't have my wife's name listed at all even though she is designated as the Transfer of Death 100% beneficiary. Perhaps this designation should also be changed? I'm surprised by the lassitude of all of this since I constantly transfer assets between my Vanguard and Schwab accounts and never even gave a second thought to these issue. However, recently I began doing estate planning and began to realize that perhaps I should fix these issues.
One thing to consider is that based on conversations I have had with Schwab and Etrade, it is straightforward to get the brokerage to record a full step up in basis in community property states upon the death of either spouse when accounts are titled either JTWROS or community property with or without ROS. In contrast, for accounts titled in an surviving spouse's same it is possible to get the brokerage to record full step up in basis but you would have to prove to the tax or legal department of the brokerage that the account contained community property.

To be clear, with respect to the Vanguard account titled in your name, your spouse would easily get a full step up if you predeceased her but if your spouse predeceased you, you would have to prove the account was community property to get get the brokerage to record a step up upon the death of your spouse.

Therefore, I think it is best, in community property states, to hold marital property either JTWROS or community property with ROS.

Regardless of whether the brokerage records a step up, one can always override what the brokerage reports and claim a stepped up basis on one's tax return when the asset is sold. Of course, it seems less likely to attract unwelcome attention if the brokerage reports the stepped up basis to the IRS.

Here's a short article that discusses the issue of getting a full step up for property titled in an individual's name in a community property state.

https://www.calcpa.org/public-resources ... f-a-spouse

Another menu item at some brokerages is community property without right of survivorship. This would be eligible for full step up upon the death of either spouse, but the deceased spouse's half would be subject to probate. To avoid this, make sure your community property account has ROS. At Etrade, last time I checked, their community property accounts could not have ROS, and i was advised to hold our martial property accounts JTWROS.
Topic Author
ilan1h
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Re: Schwab "joint account" vs. community property

Post by ilan1h »

Luckywon wrote: Mon Nov 02, 2020 1:11 am
ilan1h wrote: Mon Nov 02, 2020 12:23 am I recently became aware that one of the few financial advantages of living in California was that it was a community property state and that a surviving spouse would get a 100% step up in basis on equities. However, I noticed that my Schwab account is titled "Joint tenancy with transfer of death beneficiaries". I'm not sure why it's titled this way but was wondering if I should change it to a different designation eg: "Community property with rights of survivorship". My Vanguard account doesn't have my wife's name listed at all even though she is designated as the Transfer of Death 100% beneficiary. Perhaps this designation should also be changed? I'm surprised by the lassitude of all of this since I constantly transfer assets between my Vanguard and Schwab accounts and never even gave a second thought to these issue. However, recently I began doing estate planning and began to realize that perhaps I should fix these issues.
To be clear, with respect to the Vanguard account titled in your name, your spouse would easily get a full step up if you predeceased her but if your spouse predeceased you, you would have to prove the account was community property to get get the brokerage to record a step up upon the death of your spouse.

Therefore, I think it is best, in community property states, to hold marital property either JTWROS or community property with ROS.

Regardless of whether the brokerage records a step up, one can always override what the brokerage reports and claim a stepped up basis on one's tax return when the asset is sold. Of course, it seems less likely to attract unwelcome attention if the brokerage reports the stepped up basis to the IRS.
Thanks. That's very interesting. My main concern is alleviated since older husbands tend to pass earlier than their spouses so at least my spouse would get the 100% step up in basis. The issue would be what would happen if my wife passed first. As of now,I assume that nothing would happen because her name is not on the account? However, if I put her on as "Community Property with ROS", would I get a 100% step up in basis if she passed? That seems too good to be true since she has never been on the account to begin with, and there is a huge amount of appreciated assets in this account (from many years of investments).
increment
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Re: Schwab "joint account" vs. community property

Post by increment »

ilan1h wrote: Mon Nov 02, 2020 1:24 pm The issue would be what would happen if my wife passed first. As of now, I assume that nothing would happen because her name is not on the account? However, if I put her on as "Community Property with ROS", would I get a 100% step up in basis if she passed? That seems too good to be true since she has never been on the account to begin with, and there is a huge amount of appreciated assets in this account (from many years of investments).
If these assets were accumulated while you and your spouse lived in community-property states, then they are likely community property no matter whose names are (or are not) the account. You might like to look at the IRS publication on community property.
Alan S.
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Re: Schwab "joint account" vs. community property

Post by Alan S. »

Don't assume that the basis adjustment done upon the first spouse's death will always be a step up. Basis adjustment applies to all investments in the CPWROS separately, and you could easily have some investments with cap losses on the date of death. Those investments would have a "step down".

Schwab will also provide a designated beneficiary form on the CPWROS account that is only activated upon the death of the second spouse to pass. Vanguard will not provide an equivalent of this form on their CPWROS or JTWROS accounts.
Luckywon
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Re: Schwab "joint account" vs. community property

Post by Luckywon »

ilan1h wrote: Mon Nov 02, 2020 1:24 pm
Luckywon wrote: Mon Nov 02, 2020 1:11 am
ilan1h wrote: Mon Nov 02, 2020 12:23 am I recently became aware that one of the few financial advantages of living in California was that it was a community property state and that a surviving spouse would get a 100% step up in basis on equities. However, I noticed that my Schwab account is titled "Joint tenancy with transfer of death beneficiaries". I'm not sure why it's titled this way but was wondering if I should change it to a different designation eg: "Community property with rights of survivorship". My Vanguard account doesn't have my wife's name listed at all even though she is designated as the Transfer of Death 100% beneficiary. Perhaps this designation should also be changed? I'm surprised by the lassitude of all of this since I constantly transfer assets between my Vanguard and Schwab accounts and never even gave a second thought to these issue. However, recently I began doing estate planning and began to realize that perhaps I should fix these issues.
To be clear, with respect to the Vanguard account titled in your name, your spouse would easily get a full step up if you predeceased her but if your spouse predeceased you, you would have to prove the account was community property to get get the brokerage to record a step up upon the death of your spouse.

Therefore, I think it is best, in community property states, to hold marital property either JTWROS or community property with ROS.

Regardless of whether the brokerage records a step up, one can always override what the brokerage reports and claim a stepped up basis on one's tax return when the asset is sold. Of course, it seems less likely to attract unwelcome attention if the brokerage reports the stepped up basis to the IRS.
Thanks. That's very interesting. My main concern is alleviated since older husbands tend to pass earlier than their spouses so at least my spouse would get the 100% step up in basis. The issue would be what would happen if my wife passed first. As of now,I assume that nothing would happen because her name is not on the account? However, if I put her on as "Community Property with ROS", would I get a 100% step up in basis if she passed? That seems too good to be true since she has never been on the account to begin with, and there is a huge amount of appreciated assets in this account (from many years of investments).
If that account contains community property (for example acquired after marriage but currently titled in an individual account) you are entitled to a step up, whether or not the brokerage will cooperate in what it records in the account and reports to the IRS. You can claim the step up on the return in the year the appreciated asset is sold.

Even if the account contains your individual property (maybe inherited funds or premarital assets), my understanding is that you can gift property without tax consequences to your spouse and are therefore able to transmute individual property to community property while alive. Therefore you can retitle your individual account to a joint or community property account, or move it to a new community property account, and claim a step up if your spouse predeceases you.

I'm not a lawyer or accountant-this is based on what I have read, for example in the link above and also here:

https://www.cpajournal.com/2017/08/18/g ... tep-basis/
DavidG
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Re: Schwab "joint account" vs. community property

Post by DavidG »

Just wondering if anyone has actually opened or retitled a Schwab brokerage account with CPWROS? It looks like they only offer community property (without rights of survivorship). Called customer service and the rep told me CPWROS wasn't an option.
Luckywon
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Re: Schwab "joint account" vs. community property

Post by Luckywon »

DavidG wrote: Mon May 03, 2021 5:34 pm Just wondering if anyone has actually opened or retitled a Schwab brokerage account with CPWROS? It looks like they only offer community property (without rights of survivorship). Called customer service and the rep told me CPWROS wasn't an option.
I have. The rep you spoke with is mistaken. I suggest you ask to speak to someone in the estates department. Or call your assigned Schwab advisor if you have one and ask for assistance.

Below is the Schwab website link to the form we used to retitle our account. "Community Property With Rights of Survivorship" is one of the account ownership titling options.

https://www.schwab.com/public/file/P-57 ... -29_RE.pdf
DavidG
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Re: Schwab "joint account" vs. community property

Post by DavidG »

Luckywon wrote: Mon May 03, 2021 6:03 pm
I have. The rep you spoke with is mistaken. I suggest you ask to speak to someone in the estates department. Or call your assigned Schwab advisor if you have one and ask for assistance.

Below is the Schwab website link to the form we used to retitle our account. "Community Property With Rights of Survivorship" is one of the account ownership titling options.

https://www.schwab.com/public/file/P-57 ... -29_RE.pdf
Many thanks for the helpful information. I need to get a checking/brokerage account set up quickly for wife's inheritance, so I'm leaning toward JTWROS for now. Will revisit titling of our joint brokerage accounts when we do our estate plan, hopefully in the next few months.
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