Community property refers to property that was acquired during the course of a marriage. Community property may also be known as communal property, marital property, or shared property. California is a community property state. As such, all assets that are acquired during a marriage or domestic partnership are considered to be community property, except for each partner’s separate property.
The following assets would be considered one partner’s separate property:
- Assets that were acquired by the partner before the marriage;
- Assets that were acquired by the partner through gift, will, or inheritance;
- Assets that were purchased with the partner’s separate money; and/or
- Rents, issues, and profits that have been derived from a partner’s separate property.
The Right of Survivorship typically refers to a right granted to joint tenants to claim the entire property upon the death of another joint tenant. An example of this would be if A, B and C have joint possession of real property. C’s share will be equally distributed to A and B, when C is deceased. The Right of Survivorship is a very powerful legal right, due to the fact that it can override other legal considerations, such as inheritance claims. Until recently, the Right of Survivorship was only recognized under certain common law doctrines. It is now recognized under statute in all U.S. states.
Community property with Right of Survivorship is a relatively new form of owning real property, and was created by the California legislature in 2001. It combines the security of owning property as joint tenants with the tax benefits offered by California’s community property system. If you live in a community property state such as California, you and your spouse (or registered domestic partner) can likely avoid probate by taking title to property as community property with Right of Survivorship.
How Do You Create Community Property with a Right of Survivorship in California?
To create Community Property with Right of Survivorship, the property in question must be located in a community property state. Turning property into Right of Survivorship community property simply requires using the correct language when drafting the property’s title document. California couples need only put in writing the following clause in the title document: “Couple take title to property as Community property with Right of Survivorship.” An attorney can ensure that the correct legal language is utilized, so that creating such property is legally enforceable.
To remove the community property with the Right of Survivorship, California spouses can simply remove the survivorship provision from the title document. They would then prepare a new title document excluding Right of Survivorship.
It is important to note that the Right of Survivorship must be claimed in order to be effective. If the Right of Survivorship is not claimed within the property’s title document, the parties may not lay claim to the share of the decedent. The deceased tenant’s share could then be distributed according to other laws, such as probate laws, or according to the directions contained in the decedent’s will.
How Does Community Property with Right of Survivorship Avoid Probate?
The term probate refers to the legal process in which a person’s assets are distributed upon their death, according to their will. The probate process itself is a series of hearings that are presided over by a judge in order to:
- Determine and prove the validity of the decedent’s will;
- Document the decedent’s property that is to be distributed;
- Ensure all taxes and debts owed by the estate are paid; and
- Ensure all assets are distributed according to the decedent’s will, as well as any applicable state laws.
The probate process differs from state to state, and is largely influenced by the size of the estate that is being distributed.
Under a community property system such as in California, when the first spouse dies, the entire property automatically transfers to the survivor. The property does not need to go through the probate process in order to be transferred to the survivor. The process is thus simplified.
What Are the Pitfalls of the Community Property System? How Is a Joint Tenancy Beneficial?
Under a community property system, assets that are purchased with marital earnings, are owned equally by both spouses. This designation includes real estate purchases. Each spouse has a one-half interest in the asset, and therefore is free to dispose of their half interest in the asset however they wish. This could result in one spouse creating a will leaving their half of the community property to someone other than their spouse.
Another common issue is that what differentiates communal property and separate property is sometimes difficult to define. This is especially true if the couple has been married for a long time, and can no longer document the origin of the property in question. Additionally, some states follow quasi-community property principles. These principles govern property distributions if the couple has moved from a community property state to a non-community property state, and vice versa.
A joint tenancy is often referred to as a joint tenancy with a Right of Survivorship. Such an arrangement also grants each party a one-half interest in a piece of real estate. However, when one joint tenant dies, their property interest is immediately passed to the remaining joint tenant. A joint tenant has no right to create a will leaving their half of the property to someone else; so, the surviving joint tenant is protected.
Why Not Just Go with Joint Tenancy?
What many people do not realize is that community property offers greater tax relief than that of joint tenancy. Generally speaking, any net income from real property sold is a capital gain, and is therefore taxable. The depreciated value of the investment, which is known as the “basis”, is subtracted from the sale price, and the difference is taxed. An example of this is as follows:
- Purchase price in 1995: $100,000
- 2010 Basis (depreciated value): $50,000
- Sale price: $400,000
- $350,000 is taxable
Joint tenants enjoy the benefit of what is called a step-up basis. This refers to a scenario in which one joint tenant dies, so the property in question automatically passes to the surviving joint tenant. The basis of the decedent’s property interest “steps-up” to the value of the property at the time of their death:
- Basis: $50,000 ($25,000 for each Joint Tenant’s half-interest)
- Joint Tenant A passes away; the property is now worth $400,000
- Joint Tenant B’s new basis is $225,000 (B’s basis of $25,000 + A’s step-up basis of $200,000)
- If surviving Joint Tenant B sells the property for $400,000, only $175,000 is taxable
The tax benefits are even greater for community property. This is because community property receives a “double step-up” in basis. When one spouse dies, the basis in both spouses’ half-interest is stepped-up to the value of the property at the time of death:
- Basis: $50,000
- B passes away, leaving his half of the property to A; the property is now worth $400,000
- A’s new basis is $400,000
- If A sells the property for $400,000, nothing is taxable
As previously mentioned, community property with a Right of Survivorship is a hybrid of these two forms of real property ownership. This hybrid protects surviving spouses by preventing either spouse from passing the community property asset to someone else by will. It also grants the surviving spouse the tax benefit of the double step-up. Joint tenancy vs community property in California follows suit.
How Do I Change Joint Tenancy to Community Property with Right of Survivorship in California?
The Right of Survivorship can be terminated or extinguished at any time. The joint tenants can revoke their rights of survivorship through an express agreement or written contract, as previously discussed. They would then forfeit their survivorship rights, and the joint ownership would likely be reclassified as a tenancy in common.
If a joint tenant transfers or sells their individual property interest, the rest of the joint tenants will lose the right to survivorship. This is due to the fact that the tenants must all maintain joint possession of the property, at all times, in order to qualify for joint tenancy. If a joint tenant sells their share to another party, the remaining tenants may need to create a new joint tenancy agreement with the party who replaced the former tenant. Alternatively, the right of survivorship may be extinguished at the instruction of a judge or court order.
Do I Need a Real Estate Lawyer?
To establish community property with Right of Survivorship in California, you must file a title document with the County Recorder’s office. A skilled and knowledgeable California real estate lawyer can help you through the process and ensure it is completed effectively.
An experienced California real estate attorney can also help you decide whether community property with Right of Survivorship is right for you based on the specifics of your situation.