My further response:
Tax attributes of community property at death:
Unlike joint tenancy property, the community property with right of survivorship form of title allows the surviving spouse to obtain the tax benefits of community property upon the first spouse's death: Both the surviving and deceased spouses' interests receive a new (stepped-up) income tax basis if certain statutory conditions are satisfied. (As joint tenancy property, on the other hand, only the deceased spouse's half interest would receive a new tax basis.) [See Comm. Report for 1999 AB No. 2913, 1999-00 Reg. Sess.]
Also note that the gifted property may then receive a stepped-up basis on the donee's death. (But caveat: 26 USCA § 1014(e) denies step-up in basis in certain cases; see Ch. 12.)
On the purchaser's death, however, the basis of the bonds is stepped up to par if they are redeemed in payment of estate taxes. [Rev.Rul. 69-489, supra]
Tax consequences at death:
Legislative history states that, as between spouses, the community property with right of survivorship form of title provides both the probate avoidance benefits of joint tenancy property (above) and the tax benefits of community property title. [See Comm. Report for 1999 AB No. 2913, 1999-00 Reg. Sess.]
If the IRS concurs with that position, upon the first spouse's death, both spouses' interests in community property with right of survivorship will receive a new (stepped-up) income tax basis if certain statutory conditions are satisfied (26 USCA § 1014). This is distinct from the tax consequences of joint tenancy property, as to which only the deceased spouse's half interest would receive a new tax basis. [See Comm. Report for 1999 AB No. 2913, 1999-00 Reg. Sess.]
Limitation--basis adjustment for gifts of appreciated property:
With respect to property belonging to a decedent, the general rule is that, for income tax purposes, such property receives a new basis stepped up (increased) or stepped down (decreased) to the estate tax value of the property. [26 USCA § 1014(a); Estate of Branson v. Comm'r (9th Cir. 2001) 264 F.3d 904, 907-908] To preclude abuses whereby appreciated property might be given to a dying person solely to obtain a step-up in basis upon his or her death, a special rule was enacted in 1981:
In the case of a decedent dying after December 31, 1981, if--
• Appreciated property was acquired by the decedent by gift during the one-year period ending on the date of the decedent's death, AND
• Such property is acquired from the decedent by (or passes from the decedent to) the donor of such property (or the donor's spouse), then--
The basis of such property in the hands of such donor (or spouse) shall be the adjusted basis of such property in the hands of the decedent immediately before the decedent's death. [26 USCA § 1015(a)]
Sale of appreciated assets to realize gain:
It is ordinarily not advisable to sell the dying person's appreciated assets because, if retained, their income tax basis will be stepped up at death. (This will change in 2010 with the institution of carryover basis at death) But if there are also significant losses (which virtually must be realized so they will not be wasted), consider selling appreciated property to offset the losses.
No stepped-up basis:
IRD (or, more specifically, the right to receive IRD) is not accorded the basis adjustment given to property included in decedent's estate. [26 USCA § 1014(c)] Rather, IRD gets a carryover basis (i.e., the same as decedent's). [Rev.Rul. 82-1, 1982-1 CB 366]
Step-up in basis requires election:
The basis of partnership property cannot be adjusted (i.e., stepped up to estate tax values under 26 USCA § 1014(e)) on the death of a partner unless an election is made under 26 USCA § 754. [26 USCA § 743(a)]
Exception:
The basis of property given away to a dying donee and then inherited back by the donor from the donee's estate within one year does not get stepped up
IAAL