And What You Might Be Giving Up in Divorce
At Aloha Divorce, we often work with clients who are entering a new marriage later in life with valuable real estate already in their name. If this sounds like you—or your spouse—you may want to consider a specific kind of postnuptial agreement that could reduce or eliminate capital gains taxes down the road: a Stepped-Up Basis Postnup.
This type of postnup can be a smart estate planning move, but it does come with trade-offs. Let’s break it down.
What’s a “Step-Up in Basis” Anyway?
When someone inherits property, they don’t always owe capital gains taxes on its full value. The tax code allows for a “step-up” in the property’s cost basis—meaning the value is reset to its fair market value at the time of the original owner’s death. That can significantly reduce (or even eliminate) taxes if the property is sold soon after.
But here’s the catch: the step-up only applies to the community property portion of an asset. So if you keep that home separate, your spouse may only get a partial step-up—or none at all.
When Does a Stepped-Up Basis Postnup Make Sense?
Let’s say you bought your San Diego home 15 years ago for $500,000. It’s now worth $2 million. If you sign a Stepped-Up Basis Postnup and transmute that property to community property, and then your spouse passes, you could sell the home right away and owe no capital gains taxes on that $1.5 million in appreciation.
But be careful: If you get divorced instead, your spouse now owns half of that increase in value. That once-separate property is now subject to equal division.
Let’s Look at a Few Scenarios
With a Stepped-Up Basis Postnup:
- Spouse dies: Surviving spouse sells property with little to no capital gains tax.
- Divorce happens: Property is split equally. Your spouse may walk away with half the increased value.
Without the Postnup:
- Spouse dies: Only your half of the property gets the step-up. You may owe capital gains taxes on the rest.
- Divorce happens: As long as the property stayed separate, your spouse generally has no claim to the increased value.
Is This Right for You?
If you’re blending families, preserving your estate for your children, or planning ahead for tax-smart inheritance, a Stepped-Up Basis Postnup might make sense. But it’s important to weigh the tax benefits against the potential financial consequences of divorce.
We’re Here to Help
At Aloha Divorce, we believe in planning for your future with eyes wide open—whether it’s about love, legacy, or life’s curveballs. We regularly help California couples create customized postnups that align with their goals, including protecting assets, minimizing taxes, and honoring prior commitments to family.
