It’s normal to wonder what becomes of your treasured properties when you become indisposed or deceased.
Keeping that in mind, there’s a law in place to assure homeowners and other real estate investors of the safety of their properties after their demise — the right of survivorship. With this lawful provision in play, investors can dictate what happens to their properties if one of the owners passes away.
The right of survivorship is a constant when two people, usually spouses, collectively own a property.
Since numerous questions pop up during property purchase, we’ll extensively discuss the concept of community property with the right of survivorship. But first, let’s give meaning to the term ‘community property’.
What Is a Community Property?
The term community property is legislation peculiar to some US states, establishing the joint ownership of assets owned by married couples. It also considers the distribution of property equally between spouses.
In simple terms, the community property law explains that any income or property acquired by either spouse belongs to both parties so long as they remain in the union. That said, community property can also feature the “marital property” tag.
This legal provision is applicable in nine states: California, Arizona, Idaho, Louisiana, Wisconsin, Texas, Nevada, Washington, and New Mexico.
Residing in a community property state makes the legislation applicable to you.
The community property provision empowers each spouse to own a share of all marital assets, including debts incurred during the marriage. A typical example is cash borrowed for earnest money.
The interpretation of this legislation may vary among different states and married couples. However, it’s vital to note that, across the board, inherited gifts or claims to one spouse don’t count as community property. The same applies to acquisitions before a marriage.
What If I Don’t Reside in Any of These US States?
You may wonder how this legislation comes to play in states other than the nine mentioned earlier. The US States where the “community property” legislation doesn’t apply employ a legal distinction known as equitable distribution. This provision comes to the fore when the question of splitting properties arises.
In equitable distribution, assets are split equitably but not equally. Here, property and asset ownership isn’t 50/50. It’s worth noting that this division occurs only when a couple cannot agree on how best to split their assets. These assets can include real estate properties and inheritance claims.
In states operating the equitable distribution principle, couples who own homes together are called joint tenants. Here, the death of one spouse will see their property share transferred to their designated heir.
Therefore, equitable distribution is a deviation of what’s applicable in community property states as the latter grants full custody of the deceased’s property share to the surviving partner.
Community Property With Right of Survivorship
Having discussed the concept of community property and what it means to be joint tenants, the next thing to do is examine the former’s relation with the right of survivorship.
There is a need to carefully understand the impact of survivorship rights on community property, especially in cases where each spouse carries separate property holdings into the marriage.
Community property legislations do not apply to separate properties. In this case, survivorship rights don’t exist.
So, if either spouse dies, the other partner can’t inherit separate property unless instructions from the deceased spouse dictate otherwise.
However, let’s track back to the basis of our topic — community property with the right of survivorship. This method of title transfer, in most cases, offers a better option than a joint tenancy. Thus, it’s not surprising why there is a common joint tenancy vs. community property with the right of survivorship debate.
Before addressing the joint tenant debate, let’s see what a community property with survivorship rights means.
Simply put, community property with survivorship rights assures partners and couples that their properties are equally owned, equally shared, and will remain with the other should death befall either one of them. The goal is to get this done avoiding a probate process.
Community property with a survivorship system also affects property sharing in a divorce. Since assets have joint ownership, they will be split 50/50 between the couples. However, this split could rise to 60 percent or more if one of the partners funded the property alone.
If a spouse dies while in the custody of properties acquired before the marriage then the properties still belong to the deceased, irrespective of a community property contract. Here, real estate ownership will only pass to the other spouse when it’s a provision in the deceased’s will.
If it isn’t, the surviving spouse may file for an ownership claim in the probate process if they wish to remain in possession of the property.
Differences Between Joint Tenancy and Community Property
You may wonder what distinction exists between these two concepts as they’re somewhat similar. However, careful observation shows differences in inheritance across both. Community property with the right of survivorship seemingly combines both joint tenancy and community property into one holding title form.
As mentioned earlier, community property with the right of survivorship is a legal provision pioneered by California’s legislature in 2001. Its creation came about due to the need to combine tax benefits of community property with the protections offered by a joint tenancy. This act simply involves the inheritance of property by the spouse of a deceased partner.
On the other hand, joint tenancy allows for property ownership by two or more people, with the assurance that surviving spouses or partners will inherit the share of the other in the event of their death. All this happens while avoiding probate.
With the addition of the survivorship rights of joint tenancy to community property, spouses can get tax benefits while retaining joint property ownership, with their assets legally protected.
The Right of Survivorship Deed
The right of survivorship deed is a document based on the terms of a joint tenancy and community property with a survivorship right. It discusses the transfer of property upon the death of a joint tenant.
A grantor and grantee are required to spearhead this deed. Typically, the grantor and grantee are a married couple. The survivorship deed must have some form of consideration, and thus, it must be notarized.
Upon the grantor’s death, a witness to the deed may become necessary to ensure that the entire property becomes owned by the grantee.
For the survivorship community property deed to be effective long-term, assets must come under a joint tenancy. A joint tenancy and survivorship right agreement breach will invalidate the deed.
The most common ways to draft a survivorship deed are quitclaims or warranty deeds. A quitclaim is a deed that allows a property owner to relinquish the title of ownership on their assets.
Joint tenants use them often. Since it doesn’t provide strong protections for the remaining joint tenant, this deed is prevalent among family members or spouses who have built enough trust within themselves.
Tax Implications of Community Property With Right of Survivorship
Property taxes are standard in the United States. Hence, the capital gains tax obtained from the sale of a survivorship community property is dependent on the ownership agreement active before the owner’s death.
For joint tenancy properties, the market value of the survivorship community property obtained when the grantor dies is used as an estimate to certify the property’s primary value.
The above suggests the surviving spouse, registered domestic partner, or business partner holds their original half interest based on the initial property value. Attached to it will be an inherited interest calculated on a step-up basis. Sometimes, it might even be a double step up.
Conversely, in a “community property state” like California, the share values for both community property shares will follow the step-up basis or double step-up. Hence, the fair market value when a partner dies applies to the percentage of the surviving spouse and their inherited share.
Knowing that community property with the right of survivorship seeks to avoid probate where possible, surviving partners will be eligible for reduced cost obligations. Here, taxes owed only feature the difference between the sale price and the fair market value, again, when the owner dies.
In some cases, the survivorship provision gives a surviving spouse the right to be free from any income tax on the held properties. With this provision in effect, property sales become more straightforward.
The Power of a Will on Right of Survivorship
Do you think that a will can affect the dictates of a right of survivorship? Well, let’s find out.
To understand this, let’s give a real-world example.
So, Joseph and his wife, Laura, purchased their lovely beach house alongside their best friends, Trent and Suzy, in their third year of being married couples. Note that the house has community property with the right of survivorship.
Unfortunately, in their tenth year of marriage, Joseph dies. In his will, he leaves the property ownership title to Trent, his best friend.
Why did he do this?
Because he and Laura separated for a few months, although they were not divorced.
Question time: who do you think will successfully take the house’s title?
Well, the answer is Laura, because of the right of survivorship. The right of survivorship is a powerful legal right, and thus, it has the power to overshadow most inheritance propositions.
This statement means that regardless of the content of a will, the right of survivorship triumphs.
Getting a Community Property With Right of Survivorship
The advantage of this is clear: surviving partners get to hold property belonging to their deceased spouse.
While it might be an actual property or other variations, like an NFT, a title document associated with a living trust gives them the right to take the title over properties shared with their late partner.
If this idea appeals to you and your partner, you can contact agents near you to better structure your real estate plans.
However, while you’re at it, remember that community property with the right of survivorship, while being available in California, isn’t available in every US state. Therefore, choose an inheritance plan that suits your needs following state laws. Godspeed!
If you intend to buy a property with your spouse, consider working with a reputable real estate broker like Homes by Ardor, with lots of affordable properties you’re sure to find one that appeals to you.