If you are a married couple without a living trust, the manner in which you take title to your home can be critical. The three common ways for a married couple to title their home are explained below.
Joint tenancy is a form of ownership that includes a “right of survivorship.” At the first spouse’s death, his or her interest passes to the surviving spouse by operation of law. In other words, the property passes without probate administration, and passes to the surviving spouse irrespective of the terms of the deceased spouse’s will. While this is a convenient and inexpensive method of passing real estate to a surviving spouse, joint tenancies can have negative tax consequences. Upon the death of the first spouse, only the deceased spouse’s interest in the joint tenancy receives a “step-up” in basis for capital gains tax purposes. For a married couple that has owned a home in the Bay Area for decades, this can result in increased capital gains taxes if the surviving spouse sells the residence.
California utilizes the community property system for property owned by married couples. If an asset is community property, then each spouse owns one-half of that asset. The general presumption is that property acquired during marriage, and the income earned from that property, is community property. Unlike property held in joint tenancy, each spouse has testamentary control over their one-half interest in the community property, which means that the property will pass according to the terms of the deceased spouse’s will. There is no right of survivorship and the property may be subject to probate administration. Holding property as community property is advantageous from a tax standpoint because upon the death of the first spouse the deceased spouse’s one-half interest and the surviving spouse’s one-half interest in the property receive a step-up in basis.
Community property with right of survivorship combines the ease of administration provided by a joint tenancy with the tax advantages of community property. It allows the surviving spouse to avoid probate with respect to jointly-held assets while at the same time obtaining the step-up in basis afforded to community property. Upon the death of the first spouse, the deceased spouse’s property passes to the surviving spouse by right of survivorship, without administration. In addition, both the deceased spouse’s one-half interest and the surviving spouse’s one-half interest in the community property receive a step-up in basis. For married couples without a living trust, this is often the preferred manner of taking title.