Community Property With Right Of Survivorship
Prepared by CALIFORNIA ASSOCIATION OF REALTORS®
Member Legal Services
Tel (213) 739-8282
Fax (213) 480-7724
July 3, 2001
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2000 CALIFORNIA ASSOCIATION OF REALTORS®
(C.A.R.). Permission is granted to C.A.R. members only to
reprint and use this material for non-commercial purposes
provided credit is given to the C.A.R. Legal Department. Other
reproduction or use is strictly prohibited without the express
written permission of the C.A.R. Legal Department. All rights
reserved.
Effective July 1, 2001, California has enacted Civil Code
Section 682.1 allowing a husband and wife to hold title to their
property as community property with right of survivorship. This
new form of holding title combines the desirable tax features of
community property with the right of survivorship of joint
tenancy. This Legal Q&A discusses the implications of this
new form of taking title.
Q: 1. What is community property with right of
survivorship?
A: It is a form of taking title to jointly-owned
property, available to a husband and wife, combining the
benefits of holding title as community property and the benefits
of joint tenancy. As discussed below, it primarily impacts
estate planning and tax treatment.
Q: 2. What does the change in the law mean?
A: Previously, a husband and wife could hold title to
jointly-owned property in several different forms: as community
property, as joint tenants, or as tenants in common. Most
commonly, a husband and wife hold title to their property as
community property or as joint tenants. Each of these forms of
holding title has distinct benefits relating to estate planning
upon the death of one of the spouses. Holding title as community
property provides a "stepped-up" tax basis for both
halves of the property upon the death of the first spouse, but
no automatic transfer of title. Holding title as joint tenants
provides for the immediate and automatic transfer of title to
the surviving spouse upon the death of the first spouse, but
only the decedent's portion of the property receives a step up
in basis. Prior to July 1, 2001, a husband and wife had to
choose between these two benefits. Now, a husband and wife can
enjoy both benefits by taking title as community property with
right of survivorship.
Q: 3. What is a "stepped-up" basis?
A: Under both federal and California law, when a
person receives property from a decedent, the tax basis for that
property is the fair market value of the property on the date of
the decedent's death. For example, you just inherited property
from your aunt that she purchased in 1970 for $25,000. Today the
property is worth $250,000. Your tax basis in the property is
$250,000 and not the $25,000 that your aunt originally paid for
the property. When you dispose of property, your gain is the
difference between your basis in the property and the sales
price. Accordingly, the "stepped-up" basis is very
important in calculating your capital gains when you ultimately
dispose of the property.
Q: 4. How is the "stepped-up" basis applied to
property held as joint tenants?
A: When two people own property as joint tenants, because
the surviving joint tenant already owns one half of the
property, the surviving joint tenant only receives a
"stepped-up" basis on one half of the property. For
example, a husband and wife hold property they purchased for
$10,000 as joint tenants that is now worth $200,000. Each has an
original basis of $5,000 in their one half of the property. When
one spouse dies, the other spouse receives a step up in basis on
the one half of the property formerly owned by the deceased
spouse. One half of the property would have a basis of $100,000
(the "stepped-up" basis) and one half of the property
would have a basis of $5,000 (the original purchase basis).
Q: 5. How is the "stepped-up" basis applied to
property held as community property?
A: If a husband and wife own property as
community property, both federal and California law provide a
step up in basis for both halves of the property upon the death
of the first spouse. Using the example in Question 4, upon the
death of the first spouse, and assuming that the first spouse
left his one half of the community property to his spouse, the
surviving spouse would have a new basis of $200,000. Again, this
would provide a significant capital gains advantage on the
ultimate sale of the property and is the main advantage of
holding property as community property.
Q: 6. What is the right of survivorship?
A: When people own property as joint tenants, on
the death of one co-owner, the title to the property
automatically transfers to the surviving owner or owners. There
is no probate or other legal proceeding required. In all other
forms of joint ownership, such as community property or tenancy
in common, there is no automatic transfer upon death; the
deceased owner's portion of the title is transferred pursuant to
a will, trust, or through the rules of intestate succession if
there is no will or trust. The right of survivorship is the main
advantage of joint tenancy. It is an inexpensive estate planning
tool that avoids the expense and complication of drafting and
probating a will or administering a trust.
Q: 7. How can a husband and wife take advantage of holding title
as community property with right of survivorship?
A: On and after July 1, 2001, property can be
acquired in the new form of ownership combining the benefits of
community property and joint tenancy. On and after July 1, 2001,
a husband and wife can transfer jointly held property to
themselves as community property with right of survivorship.
Q: 8. Can any couple take advantage of this form of holding
title?
A: No. It is only available to a husband and
wife. Other couples can take title as joint tenants or tenants
in common. For complex estate planning issues, a trust may be
the best form of taking title.
Q: 9. Does this form of holding title apply only to real
property?
A: No. A husband and wife can hold title to both real
and personal property as community property with right of
survivorship.
Q: 10. What must the surviving spouse do to "perfect"
title acquired by right of survivorship?
A: Although title held as community property with
right of survivorship passes automatically to the surviving
spouse upon the other spouse's death, in order to
"perfect" title so that the property can be sold or
financed with title insurance, the surviving spouse will need to
record an Affidavit of Death of Spouse. This procedure is
similar to the Affidavit of Death of Joint Tenant for joint
tenancy property.
Q: 11. How can the right of survivorship be terminated?
A: Prior to the death of either spouse, the right of
survivorship can be terminated in the same way as for joint
tenancy. For example, one spouse can record a written
declaration terminating the right of survivorship. Similarly, a
recorded deed from one spouse naming himself or herself as both
grantor and grantee will terminate the right of survivorship. In
addition, the spouses can mutually agree to terminate the right.
Q: 12. What effect does holding title as community
property with right of survivorship have upon a will?
A: Property held as community property with right of
survivorship, like joint tenancy property, passes automatically
to the surviving title holder by operation of law and not by
will. This feature is unlike community property without the
right of survivorship. For property held as community property
without the right of survivorship, each spouse has the right to
dispose of his or her one half of the community property by
will. If this feature is important to one of the spouses, then
taking title as community property with right of survivorship
may not be the right choice.
Q: 13. Should all married couples take title as community
property with right of survivorship?
A: The main benefits of community property with right
of survivorship are probate avoidance with the right of
survivorship and favorable tax treatment with the double
"stepped-up" tax basis. For many couples it will be a
simple and inexpensive way to accomplish both. However, for many
other couples, holding title in a living trust (intervivos
trust) may offer more flexibility in estate planning and still
reduce estate taxes and capital gains. The added flexibility of
a trust is also desirable if there are children involved, and
especially when there are children from a prior marriage. Even
with the repeal of the estate tax (which is not effective until
after December 31, 2009) in the recently passed tax relief act,
couples can increase the amount of wealth they transfer tax-free
to beneficiaries through careful use of the "unified
credit" and the marital deduction. The "unified
credit" is the amount an individual can transfer upon death
free of estate taxes. With the marital deduction, a spouse can
transfer any amount to the surviving spouse free of estate
taxes. Using trusts, a couple can essentially double the amount
of the unified credit upon the death of the surviving spouse.
Because there are positive and negative aspects to most estate
planning choices, a husband and wife should confer with an
attorney, accountant or estate planner before deciding which
form of taking title is best for them.
Q: 14. Where can additional information regarding the
topic discussed in this memorandum be obtained?
A: This memorandum is one of the many Legal Briefs,
Legal Q&As, and other free legal publications made available
to REALTORS® by C.A.R. These publications are available at many
local Associations/Boards of REALTORS®, and are automatically
distributed to subscribers of PreventionExpress™, C.A.R.'s
suite of products and services designed to help REALTORS® stay
abreast of legal developments affecting the real estate
industry. For information on PreventionExpress™, contact Real
Estate Business Services, Inc., a C.A.R. subsidiary, at
213.739.8227. In addition, many C.A.R. publications are
available through C.A.R.'s website at http://www.car.org
or CARFAX, C.A.R.'s fax-on-demand system. To access CARFAX, call
213.739.8329 and request the CARFAX catalogue.
For free recorded messages on more than 200 real estate-related
topics, C.A.R. members can call C.A.R.'s Automated Legal
Information System, or ALIS®, 24 hours a day. To access ALIS®,
simply call 213.739.8205 from a touch-tone phone and follow the
prompts.
Readers who require specific advice should review their facts
with an attorney. C.A.R. members requiring legal assistance may
contact C.A.R.'s Member Legal Hotline at 213.739.8282, Monday
through Friday, 9:00 A.M. to 6:00 P.M. C.A.R. members who are
broker-owners, office managers, Designated REALTORS® or
PreventionExpress™ subscribers may contact the Member Legal
Hotline at 213.739.8350 to receive expedited service. Members
may also fax or e-mail their questions to the Member Legal
Hotline at 213.480.7724 or legal_hotline@car.org.
Written correspondence should be addressed to:
California Association of REALTORS®
Member Legal Services
525 South Virgil Avenue
Los Angeles, California 90020
The information contained herein is believed accurate as of July
3, 2001. It is intended to provide general answers to general
questions and is not intended as a substitute for individual
legal advice. Advice in specific situations may differ depending
upon a wide variety of factors. Therefore, readers with specific
legal questions should seek the advice of an attorney.
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