By: Fred Chernoff
While we at Odom Law Group strongly recommend using a Living Trust for asset protection, bypassing probate, and controlling how property is accessed and controlled during lifetime as well as how it is distributed after death, for those married couples not yet in a position to create a Living Trust, titling real property as community property with right of survivorship in California can provide powerful benefits.
First, it allows for a simplified transfer of ownership upon the death of one spouse. Under community property with right of survivorship, upon the death of one spouse, the surviving spouse becomes the sole owner of the property through the right of survivorship, without the need for probate. This can save time and money, as probate can be a costly and time-consuming process.
Furthermore, titling property as community property with right of survivorship can provide significant tax advantages by allowing a surviving spouse to obtain the tax benefits of community property on the death of the other spouse. For spouses, community property provides state and federal income tax benefits upon the death of the first spouse (26 U.S.C. § 1014 and Cal. Rev. & Tax. Code § 18031). On the death of the first spouse, the deceased spouse’s and the surviving spouse’s undivided one-half shares in community property both receive a step-up (or a step-down) in basis to the fair market value of the property as of the date of the deceased spouse’s death, frequently called a double step-up in basis (26 U.S.C. § 1014(a)(1), (b)(1), and (b)(6); Cal. Rev. & Tax. Code § 18031). This means, for example, that if the surviving spouse inherits the deceased spouse’s share of the property and sells the property shortly after the deceased spouse’s death, the surviving spouse will pay little to no federal or state capital gains tax on the sale of the property.
As an example, imagine Alice and Bob purchased a home in 2003 for $200,000, and hold title to the home as Community Property with Right of Survivorship. Now, that same home is worth $1,000,000. If Alice and Bob decide to sell the house for $1,000,000, they would be taxed on the difference between the sale price and their adjusted basis ($200,000), or $800,000. However, if Bob passes away and Alice wants to sell the house, upon Bob’s death, both his interest and Alice’s interest receive a stepped up basis (hence being referred to as a double step-up) to the fair market value at the date of death. Therefore, under this scenario, holding title as Community Property with Right of Survivorship would result in Alice being taxed on the difference between the sale price ($1,000,000) and her adjusted basis ($1,000,000), or nothing.
Although community property with right of survivorship can provide these benefits, it’s not suitable for every couple. It’s important for each couple to consult with an attorney and review their financial and estate planning goals before deciding whether to title their property as community property with right of survivorship. For most married couples, a Living Trust will be the superior estate planning mechanism to accomplish their goals.
In conclusion, for married couples not in a position to create a Living Trust, titling real property as community property with right of survivorship in California can provide significant benefits, including simplified transfer of ownership upon death and tax savings. Please reach out to us at Odom Law Group with your financial, estate planning, and real property titling questions and to discuss your goals as well as the most effective ways to achieve them.