Community property is property that was acquired during a marriage. Community property may also be referred to as:
- Communal property;
- Marital property;
- Shared property.
The State of California is a community property state, which means that all assets that were acquired during a marriage or domestic partnership are classified as community property, except for each party’s separate property. Assets that may be considered separate property of one of the parties includes:
- Assets that were acquired by one of the partners before the marriage;
- Assets that were acquired by one of the partners through:
- Assets that were purchased with the partner’s separate money; or
- Rents, issues, and profits that came from a partner’s separate property.
The right of survivorship usually refers to rights that are granted to joint tenants to claim an entire property upon the death of the other joint tenant. This right is a very powerful legal right because it can override other legal considerations, for example, inheritance claims.
Community property with the right of survivorship is a relatively new way to own real property that was created in 2001 by the California legislature. This type of ownership combines the security of owning property as joint tenants with the tax benefits offered by the community property system in California.
An individual may reside in a community property state, such as California. In this case, they and their spouse or registered domestic partner can most likely avoid probate by taking title to their property as community property with the right of survivorship. If an individual has any questions about this type of property ownership, they should consult with a local California attorney.
How Do You Create Community Property With a Right of Survivorship in California?
In order to create community property with the right of survivorship, the property has to be located in a community property state. Making property into right of survivorship community property only requires using the proper language when drafting the title document for the property.
In California, a couple must only include the following clause in the title document: “Couple takes title to the property as Community property with Right of Survivorship.” A lawyer can ensure that the correct legal language is used so that the creation of this type of property is legally enforceable.
In order to remove the community property with right of survivorship categorization, an individual can simply remove the survivorship provision from the title document. Then, a new title document would be prepared that excluded the right of survivorship clause.
It is important to be aware that the right of survivorship has to be claimed in order to be effective. If the right is not claimed within the title document to the property, the parties cannot lay claim to the share of the decedent.
The share of the decedent may then be distributed pursuant to other laws, for example, probate laws or pursuant to the instructions contained in the decedent’s will.
How Does Community Property With Right of Survivorship Avoid Probate?
The term probate is the legal process in which an individual’s assets are distributed upon their death, pursuant to their will. The probate process involves a series of hearings conducted in order to:
- Determine and prove the validity of a will;
- Document the decedent’s property that is to be distributed;
- Ensure all of the taxes and debts that are owed by the estate are paid; and
- Ensure all assets are distributed according to the decedent’s will and any applicable state laws.
The probate process varies by state and is influenced by the size of the estate that is being distributed. In a community property state, such as California, the effect of the spouse’s death is that the entire property automatically transfers to the surviving partner.
The property does not need to pass through the probate process in order to be transferred to the surviving partner, meaning the process is simplified.
What Are the Pitfalls of the Community Property System? How Is a Joint Tenancy Beneficial?
With a community property system, assets that are purchased with marital earnings are owned equally by both parties, including real estate purchases. Each spouse owns a one-half interest in the asset and may dispose of their half in any way they wish.
This may result in one of the spouses creating a will that leaves their half of the community property to an individual other than their spouse. Another common issue is that communal property and separate property are sometimes difficult to define.
This is especially true in situations where a couple has been married for a long time and can no longer document the origin of the property. In addition, some states follow quasi-community property principles. This will govern if the spouses moved from a community property state to a non-community property state and vice versa. In some cases, a joint tenancy may be beneficial.
Joint tenancy is commonly referred to as joint tenancy with the right of survivorship. This arrangement also provides each of the parties with a one-half interest in the real estate.
However, when one of the joint tenants passes away, their property interest immediately passes to the surviving joint tenant. Joint tenants do not have the right to create a will that leaves their half of the property to another individual.
This means that the surviving joint tenant is protected.
Why Not Just Go With Joint Tenancy?
Community property offers owners better tax relief than joint tenancy. In general, any net income from real property sold is called capital gain, and therefore, is taxable.
The depreciated value of an investment, known as the basis, is subtracted from the sale price, and the difference between the two is taxed, for example:
- Purchase price in 1995: $100,000;
- 2010 basis (depreciated value): $50,000;
- Sale price: $400,000; and
- $350,000 is taxable.
Joint tenants have the benefit of what is referred to as a step-up basis. This is a scenario in which one joint tenant passes away, and the property automatically passes to the surviving joint tenant.
This means that the basis of the decedent’s property interest will automatically step up to the value of the property at the time they passed away, for example:
- 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); and
- If surviving Joint Tenant B sells the property for $400,000, only $175,000 is taxable.
The tax benefits provided are even greater for community property because community property receives a double step-up in basis. When one of the spouses passes away, the basis in both of the spouses’ half-interests is stepped up to the value of the property at the time of death, for example:
- Basis: $50,000;
- B passes away, leaving their half of the property to A; the property is now worth $400,000;
- A’s new basis is $400,000; and
- If A sells the property for $400,000, nothing is taxable.
As noted above, community property with the right of survivorship is a hybrid of these two types of real property ownership. This protects surviving spouses by preventing either party from passing the community property asset to another individual by will.
It also provides the surviving spouse with the tax benefit of the double step-up. Joint tenancy and community property in California follow suit.
How Do I Change Joint Tenancy to Community Property With Right of Survivorship in California?
The right of survivorship may be terminated at any time. A joint tenant may revoke their right of survivorship through an express agreement or written contract.
This means that they would forfeit their survivorship rights, and the joint ownership would most likely be reclassified as a tenancy in common. If a joint tenant sells or transfers their interest in the property, the remaining joint tenants will lose the right to survivorship.
This is because all of the tenants have to maintain joint possession of the property at all times in order to qualify as a joint tenancy. If one of the joint tenants sells their share to another party, the remaining joint tenants may be required to create a new joint tenancy agreement with the party who replaced the former tenant.
In the alternative, the right of survivorship can be extinguished by the instruction of a court order.
Do I Need a Lawyer?
If you have any issues, questions, or concerns related to community property with the right of survivorship in California, it is essential to consult with a California property lawyer. In order to establish community property with right of survivorship in California, you have to file a title document with the County Recorder’s office.
Your lawyer can help you with this document and its filing to ensure it is complete and valid under the law. Your attorney can also help you determine whether community property with the right of survivorship is right for you based on the specifics of your situation.