Community Property with Right of Survivorship
Better than joint tenancy
By Renée Rodda Married couples in California have been able to hold property as “community property with right of survivorship” since July 1, 2001. Unfortunately, many realtors, lenders, and attorneys are not aware of the benefits of this method of holding title, so it is rarely used. When couples consider purchasing property, they are often advised that their options are tenants in common, joint tenancy, or community property (without the right of survivorship). Real estate agents generally advise couples purchasing property to hold title as joint tenants. The benefits of this status include a guarantee that the surviving spouse will inherit the property with little or no transfer cost. The survivor is also assured of inheriting the decedent’s share since a secret will cannot divest a joint tenancy interest. However, as a joint tenant, the surviving spouse receives a step-up in basis of only 50% of the FMV at the time of the decedent’s death. The remaining 50% retains the surviving spouse’s original basis (Civil Code §682.1). As an alternative to joint tenancy, some married couples hold title to their property as community property. This gives them the benefit of the double step-up in basis, but each spouse can will his or her share of the property to anyone they wish. There is no guarantee that the surviving spouse will inherit the property. Additionally, if the property does pass to the surviving spouse, he or she must file a “spousal property petition.” This process may require the survivor to incur legal expenses to remove the deceased spouse’s name, and can take six to eight weeks.
Joint tenancy Avoids probate Single basis step-up Not affected by a secret will Grantee signature not required
Community property Requires fast-track probate Double basis step-up 50% can be transferred by a secret will Grantee signature not required
Community property with right of survivorship Avoids probate Double basis step-up Not affected by a secret will Grantees must sign the deed
Community property with right of survivorship — combined benefits
Community property with right of survivorship combines the tax benefits of holding title as community property, with the ease of property transfer available to the survivor of joint tenancy property (Civil Code §682.1). Property held as community property with right of survivorship passes to the surviving spouse, no matter what is written in a will or trust. Holding title to property as community property with right of survivorship: • Allows the double step-up in basis; • Requires that the surviving spouse inherit the property; and • Allows property to pass to the surviving spouse without court action.
Converting to community property with right of survivorship
You may want to advise clients who already hold property as joint tenants, or as community property, to consider converting that property to community property with right of survivorship. The process is not expensive or complicated, and it can save tax and headaches later. Married couples may accomplish this by executing new deeds. However, deeds creating community property with right of survivorship require that the grantee, or husband and wife who are receiving the property, sign (or initial) the deed, thereby agreeing to the terms of survivorship. So, it appears that if the couple is changing title from themselves in a prior form to themselves in the new form, they must sign the deed twice, once as the transferors (grantors) and once as the transferees (grantees).
Example of Basis to Surviving Spouse Steve and Kathy are a married couple who own a rental property with a basis of $100,000 and a FMV of $1,000,000. Each wants to leave the rental to the other when they die. Assume Steve dies on August 1, 2006:
Courtesy of SPIDELL’S CALIFORNIA TAXLETTER® OCTOBER 2006 www.caltax.com
www.KreiderCPA.com