Community Property

C is correct. In community property states, BOTH halves of community property receive a step-up in basis at the first spouse's death. The original cost basis was $200,000, but at Robert's death, the entire property (both Elena's 50% and Robert's 50%) steps up to the fair market value of $600,000. When Elena sells at $600,000, her new basis is $600,000, resulting in zero capital gains tax. This is the powerful "double step-up" benefit unique to community property.

A is incorrect because it ignores the step-up in basis entirely and uses the original $200,000 cost basis. B is incorrect because it applies JTWROS rules (only the deceased's half gets step-up) instead of community property rules. In JTWROS, only Robert's $300,000 half would receive step-up, leaving Elena with $500,000 basis and $100,000 taxable gain. D is incorrect due to a calculation error and misunderstanding of the community property step-up rules.

C is correct. California is one of the 9 community property states. The complete list is: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. These states follow the principle that assets acquired during marriage are owned 50/50 by both spouses.

A (Florida), B (New York), and D (Massachusetts) are common law property states, not community property states. In common law states, property ownership is determined by whose name is on the title or who purchased the asset, rather than automatic 50/50 marital ownership. Most U.S. states follow common law property rules.

B is correct.

Community Property: Both halves receive step-up in basis. Original basis $400,000 steps up entirely to fair market value of $1,000,000.

JTWROS: Only the deceased spouse's half receives step-up. Calculation:
- Surviving spouse's original half: $200,000 (50% of $400,000 original basis)
- Deceased spouse's half steps up to: $500,000 (50% of $1,000,000 FMV)
- New total basis: $200,000 + $500,000 = $700,000

The community property registration provides a $300,000 higher basis ($1,000,000 vs $700,000), which translates to $300,000 less in taxable capital gains if the surviving spouse sells the securities.

A is incorrect because JTWROS does not provide full step-up on both halves. C reverses the values. D incorrectly suggests JTWROS receives full step-up while community property receives none, which is backwards.

C is correct (the EXCEPT answer). Community property accounts do NOT provide the same step-up treatment as JTWROS. Community property provides a double step-up (both halves step up to fair market value), while JTWROS only provides step-up on the deceased owner's half. This is the critical tax planning distinction between the two ownership structures. The double step-up advantage of community property can eliminate substantial capital gains tax for the surviving spouse.

A is accurate: California, Texas, and Arizona are three of the 9 community property states (the others are Idaho, Louisiana, Nevada, New Mexico, Washington, and Wisconsin). B is accurate: the fundamental principle of community property is 50/50 ownership of marital assets, regardless of who earned the income or whose name is on the account. D is accurate: separate property (acquired before marriage, through gift, or inheritance) is not subject to community property rules and remains the individual spouse's property. This distinction is critical for estate planning and property division.

C is correct. Statements 1, 2, and 4 are accurate.

Statement 1 is TRUE: In community property states, both halves of community property receive a step-up in basis at the first spouse's death. If David dies when the stock is worth $500,000, the entire account basis steps up from $150,000 to $500,000 (both Michelle's half and David's half). This double step-up is the primary tax advantage of community property.

Statement 2 is TRUE: Community property is owned 50/50 by both spouses, regardless of who contributed the funds or whose name is on the account. This equal ownership is automatic for assets acquired during marriage in community property states.

Statement 3 is FALSE: Community property and JTWROS provide identical estate tax treatment (no estate tax advantage for either). Both include the deceased spouse's proportional share (50%) in their taxable estate. The difference is in capital gains tax treatment (step-up in basis), not estate tax treatment. Neither ownership structure reduces estate taxes.

Statement 4 is TRUE: Community property includes survivorship rights. When David dies, his 50% automatically passes to Michelle (assuming no will provision to the contrary, which would be unusual for community property). Like JTWROS, community property avoids probate through automatic transfer to the surviving spouse.