There is a New Way to Hold Title:
"Community Property
with Right of Survivorship"

By Rosario Perry, Esq.

California has enacted Civil Code Section 682.1 (effective July 1, 2001) allowing a husband and wife to hold title to their property as "community property with right of survivorship" (hereinafter referred to as CPRS). This new form of holding title combines the desirable tax features of community property with the right of survivorship of joint tenancy. (i.e., no probate is needed after the death of the first to die). This type of property ownership only impacts estate planning and tax treatment for the married couple.

Before this law went into effect, a husband and wife could hold title to jointly-owned property in several different forms: (1) as community property, (2) as joint tenants, or (3) 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. In other words, the surviving spouse would have to probate the property (at time delays and costs). 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 (the surviving spouse had to record a death certificate to show that the other spouse had died, but that was very quick and inex-pensive). However, with joint tenancy 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 CPRS. [Note that Title held as community property with right of survivorship passes automatically to the surviving spouse upon the other spouse's death. However, 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].

Stepped-Up Basis
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 inherited property from your mother today, that she purchased in 1980 for $25,000, and today the property is worth $250,000. Your tax basis in the property is $250,000 and not the $25,000 that your mother originally paid for the property. [Your mother's estate however must pay estate tax based on the $250,000 value of the property in her estate. This is a side issue, discussed below]. When you sell the property later, your gain is the difference between your basis in the property (i.e. $250,000) and the sales price you will receive. For instance, say you sell the property next year for $300,000. Then you only need to pay tax on the gain you realized, i.e. the difference between your basis $250,000 and the sales price $300,000. Accordingly, the "stepped-up" basis is very important in calculating your capital gains when you ultimately dispose of the property. In our example you have saved tax on the gain from $25,000 (your mother's costs) to the $250,000 value (your basis— the value of the property at the time of your mother's death).

The "Stepped-Up" Basis Is Applied
to Property Held as Joint Tenants
When two people (whether married or not) own property as joint tenants ( i.e., each owns 50% undivided interest in the property), 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. I.e. the 1/2 that surviving joint tenant receives from the deceased. For example, a husband and wife hold property as joint tenants that they purchased for $10,000 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 new basis immediately after death of $100,000 (the "stepped-up" basis) and the surviving spouse's one half of the property would have a basis of $5,000 (the original purchase basis).

The "Stepped-up" Basis Applied
to Property Held as Community Property
If a husband and wife own property as community property, both federal and California law pro-vide a step up in basis for both halves of the property upon the death of the first spouse (assum-ing that the deceased spouse's share goes to the husband). Using the example above, 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. Also remember, that a deceased spouse can transfer any amount of property to the surviving spouse free of estate taxes.

Automatic Transfer at Death with Joint Tenancy
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 pro-ceeding 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.

Automatic Transfer at Death
with Community Property with Right Of Survivorship
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 also transfer property they currently own as jointly held property to themselves as community property with right of survivorship. Note, only married couples can take advantage of this form of ownership, and a husband and wife can hold title to both real and personal property as community property with right of survivorship. SMRR in Santa Monica will not be able to extend this benefit to Domestic Partners.

Some Things to Remember
& Always See an Attorney Before Buying or Selling
First, 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.

Second, CPRS supercedes a Will. Property held as community property with right of survivor-ship, like joint tenancy property, passes automatically to the surviving title holder by operation of law. Thus a deceased spouse's will which stated that his/her half of the property goes to someone other than the surviving spouse will NOT be given any effect. This feature is unlike community property without the right of survivorship. For property held as community property (old fashion way), each spouse HAS the right to dispose of his or her one half of the community property by will.

Third, the main benefits of CPRS are probate avoidance with the right of survivorship and favor-able tax treatment with the double "stepped-up" tax basis. It is a simple and inexpensive way to accomplish both. However, for other reasons, 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 the first to die wishes to leave that child his/her half of the real property), and especially when there are children from a prior marriage. If these issues are not relevant to your situation, than do the CPRS. Remember also, that it is always better to take title as CP with RS rather than as Joint Tenants.