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Community property with right of survivorship in California

Community property with right of survivorship in California under Civil Code section 682.1 is the topic of this blog post. The major benefit of holding title as community property has been a double step-up in basis at the death of a spouse. The major difficulty of holding title as community property is transfer of full ownership to the surviving spouse when the first spouse dies.  This used to mean filing a spousal probate petition.

Many married couples hold title to property as joint tenants because they do not understand how the step-up in basis works. Joint tenancy does allow transferring full ownership to the surviving spouse quickly and easily, in most cases it requires little more than an affidavit of death of joint tenant and a certified copy of the death certificate being recorded with the County Recorder where the real property is located.

Civil Code § 682.1 states that,

“(a) Community property of a husband and wife, when expressly declared in the transfer document to be community property with right of survivorship, and which may be accepted in writing on the face of the document by a statement signed or initialed by the grantees, shall, upon the death of one of the spouses, pass to the survivor, without administration, pursuant to the terms of the instrument, subject to the same procedures, as property held in joint tenancy. Prior to the death of either spouse, the right of survivorship may be terminated pursuant to the same procedures by which a joint tenancy may be severed. Part I (commencing with Section 5000) of Division 5 of the Probate Code and Chapter 2 (commencing with Section 13540), Chapter 3 (commencing with Section 13550) and Chapter 3.5 (commencing with Section 13560) of Part 2 of Division 8 of the Probate Code apply to this property.

(b) This section does not apply to a joint account in a financial institution to which Part 2 (commencing with Section 5100) of Division 5 of the Probate Code applies.

(c) This section shall become operative on July 1, 2001, and shall apply to instruments created on or after that date.

This post will now discuss a hypothetical example of the tax savings possible by holding title as community property with right of survivorship under California Civil Code § 682.1.

We will assume that a couple bought a home in 1989. Five years later they move out, converting the home into a rental property. The husband manages the property as the wife dislikes dealing with it. Many years later the rental property has been depreciated down to very little. More importantly, the value has risen to unbelievable levels.

The husband and wife bought the property for $100,000, and depreciated it down so the basis is now $40,000. It sells for $300,000 after commissions and costs of sale.

There are several possible scenarios that can happen in this situation depending on when the home is sold and how title was held.

The first scenario is the worst possible one. The husband gets sick and while he is on his deathbed the wife sells the home before the husband dies. The profit is calculated as, $300,000 – $40,000 = $260,000 is taxable.

The second scenario is the best possible one but only if title is held as community property with right of survivorship. The husband dies and the wife sells it right away.

If title was held as joint tenants the basis in the inherited home property is stepped-up to the date of death value. The wife inherited one-half from the husband, she already owned her half.  So the wife’s basis was $20,000 which is one-half of $40,000. It stays the same. She already owned it and did not inherit it.  The husband’s one-half which is now owned by the wife is stepped-up to $150,000. So the wife’s basis is now $170,000. When she sells the home for $300,000, only $130,000 is taxable.  Better than the first scenario but still not ideal.

The best possible scenario is where title is held as community property with right of survivorship. This is because Federal tax law states that the basis of 100% of community property is stepped-up to the date of death value.  So the wife’s basis is now $300,000.  So when she sells the home for $300,000, nothing is taxable.

Holding title as community property with right of survivorship allows a couple to have the best of both worlds: you have the simplicity of joint tenancy, and the tax benefit of community property by the creation of community property with right of survivorship.

To view more than 300 sample legal documents for California and Federal litigation sold by the author of this blog post use the link shown below.

http://www.scribd.com/Legaldocspro/documents

The author of this article, Stan Burman, is an entrepreneur and freelance paralegal who has worked in California and Federal litigation since 1995.

*Do you want to use this article on your website, blog or e-zine? You can, as long as you include this blurb with it: “Stan Burman is the author of over 300 sample legal documents for California and Federal litigation and is the author of a free weekly legal newsletter. You can receive 10 free gifts just for subscribing.  Visit his website at http://www.legaldocspro.com for more information. You can view sample legal document packages for sale by going to http://www.legaldocspro.com/downloads.aspx

DISCLAIMER:

Please note that the author of this blog post, Stan Burman is NOT an attorney and as such is unable to provide any specific legal advice. The author is NOT engaged in providing any legal, financial, or other professional services, and any information contained in this blog post is NOT intended to constitute legal advice.

The materials and information contained in this blog post have been prepared by Stan Burman for informational purposes only and are not legal advice. Transmission of the information contained in this blog post is not intended to create, and receipt does not constitute, any business relationship between the author and any readers. Readers should not act upon this information without seeking professional counsel.

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