Frequently Asked Questions About Joint Tenancy and Community Property
What is Joint Tenancy?
Joint Tenancy is a form of co-ownership in which two or more persons own an asset in equal, undivided interests as their separate property.
- Title to the property must describe the owners "as joint tenants" or describe the transfer to them as a transfer "in joint tenancy".
- One very important charecteristic of joint tenancy is that the interest of a joint tenant who dies vest immediately in the surviving joint tenant(s), regardless of the deceased joint tenant's will. No probate administration of the deceased joint tenant's interest is needed.
What is Community Property?
Most property owned by a couple is community property.
- Community property includes all of their real property situated in California, and all of their personal property wherever situated, acquired during marriage, other than property acquired by gift, bequest, devise or descent.
- Property acquired jointly during marriage is presumed to be community property for the purpose of dividing the property upon dissolution of marriage or legal separation.
- A couple can hold title in their names "as community property". Even if they hold the title as joint tenants, more than likely the property is community property.
- In short, the form of the instrument under which a couple holds title--i.e. as joint tenants--does not conclusively determine the charecter (community or separate) of their ownership.
What is Community Property With Right Of Survivorship?
California recently added a third way for a married couple to hold title: community property with right of survivorship. This allows the double step-up in the income tax basis in the property when one spouse dies (see answer to next question) while also automatically vesting full title in the name of the surviving spouse.
If the surviving spouse becomes the sole owner of the family home when one of us dies, what difference does it make whether our home is community property or not?
- Step Up. When an individual dies, the income tax basis of assets owned at death are "stepped-up" to the value at death. (See answers to FAQ regarding Taxes.) The step-up can provide a huge tax benefit to the beneficiaries upon the subsequent sale of the assets. For income producing property, the step-up means that far greater depreciation is available for income producing property.
- Double Step Up. All community property, not just the half interest of the deceased spouse, acquires a stepped-up basis at the death of either spouse. For example, if a couple purchased a home in the 1950's for $15,000, their basis is $15,000, plus the cost of improvements they have made. If the value of the home is $750,000 when the first spouse dies, the entire home, not just the half belonging to the first spouse, acquires a stepped-up basis. The same applies to other asses, such as securities. That full step-up dramatically increases financial and estate planning options for the surviving spouse.
- Half Step Up. If the asset is not community property, only the interest of the deceased spouse is stepped up. In the above example, assuming there were no improvements to the property and the home was not community property, the interest of the deceased spouse is stepped up to $375,000 (half the value at death) while the basis for the surviving spouse's interest remains at $7,500, half of the original basis. The surviving spouses new basis is therefor $382,500 ($375,000, plus $7,500). If the surviving spouse elects to sell the home, he or she may well face a capital gains tax even after the exclusion of $250,000 on the sale of the residence.
Are there any other important differences between community property and separate property when one of us dies?
One very important one. Historically, joint tenancy property provides greater protection than community property for the surviving spouse since the interest of the deceased spouse vests automatically in the surviving spouse and is not subject to the creditors of the deceased spouse (other than mortgages and liens already on the home.)
Holding title in community property means the surviving spouse acquires the deceased spouse's half interest subject to the deceased spouse's creditors. The hybrid form - taking title "in community property with right of survivorship" - carries the same protection from creditors as joint tenancy.
Can we establish the community property charecter of our home through a living trust?
Yes. Title to your family home will be in your names as Trustees of your living trust. The law states the transfer of property to a couple's revocable trust is presumed to retain the character (community or separate) the property had prior to the transfer. To make sure that trust property is administered and distributed as you intend when one spouse dies, it is important that you characterize all property in your living trust as community or separate property.