Joint Tenancy v. Community Property
Earnings during marriage for work performed during marriage are community property, meaning each spouse owns 50%. But many spouses title real estate and other assets as ‘joint tenants’ rather than as ‘community property.’ If one spouse dies and the asset is held as joint tenants, there is no probate and the deceased spouse’s half automatically passes to the surviving spouse with the recording of an affidavit death of joint tenant.
On the other hand, the deceased spouse’s half of the community does not automatically pass to the surviving spouse. It needs to go through a court procedure called probate. Sometimes that procedure can be done more quickly by a Spousal Property Petition. Even the probate can be avoided if title is held by the couple ‘husband and wife as community property with right of survivorship.’
When an asset is sold, the difference between the basis (typically the amount paid for the asset) and the amount it is worth is taxed (at a favorable rate) as capital gain. When a person dies (except for such assets as IRAs and retirement plans), the gain is forgiven and the person inheriting the asset receives a new (stepped up) basis in the asset equal to its value on the date of the old owner’s death.
But joint tenancy and community property assets are treated differently when one spouse dies for purposes of gain forgiveness. When one spouse dies, for joint tenancy assets there is a new (stepped up) basis on the deceased spouse’s half of the asset. When one spouse dies, for community property assets there is a new (stepped up) basis on both halves of the asset.
When a married couple transfers by deed their real properties into the trust, they are no longer held as joint tenants. In my married couple trusts, there is a statement that the couple agrees that any joint tenancy assets transferred to the trust shall henceforth be held in the trust as community property. This is done in order to qualify the assets for the double step up in basis when one spouse dies.
Remember that a joint tenancy asset avoids probate when one spouse dies while an asset held by the revocable living trust avoids probate when one spouse dies and also when the second spouse dies. Other benefits of a revocable living trust are discussed in other articles in my blog.