Understanding right of survivorship: What you need to know

The passing of a beloved family member or friend is hard enough to deal with. No one wants the additional stress of having to deal with probate and the potential for difficult battles over how their property will be distributed. Transferring ownership through a right of survivorship or right to survivorship on title can enable both financial security and peace of mind so your loved ones can focus on dealing with grief and healing.

Every situation is different. This general informational article shouldn’t be taken as legal advice. If you have questions on your personal situation, we recommend reaching out to an estate planning attorney.

How right of survivorship works

The right of survivorship in a title allows for the passage of ownership to the other owners on title when one of the owners passes. Each individual on the title has a 100% ownership interest in the asset. Because the transfer is automatic upon death and doesn’t go through probate, right of survivorship supersedes any will.

For a right of survivorship to be valid, all parties must possess an undivided interest in the asset. This is generally accomplished through joint tenancy with right of survivorship (JTWROS) or community property, in states that recognize the principle.

Joint tenancy explained

Joint tenancy is an ownership structure in which each owner holds an undivided interest in the property. That means to do something like sell or refinance the property, you have to have the consent of every owner. It automatically comes with a right of survivorship where the house is passed to the remaining owners on title.

This is often confused with tenancy-in-common ownership, usually used between business partners or friends. While everyone has equal interest when the title is set up this way, the property interest is divided so that each owner can dispose of their interest in the property as they wish. For example, if Joe and Taylor held equal interest in a cabin and Joe passed, instead of automatically going to Taylor, Joe’s interest can be passed to their heirs.

Community property explained

Some states treat property or debts taken on during marriage as community property. This means that for the course of the marriage, a couple has equal interest in all property purchased by either spouse. Anything prior to the marriage remains sole and separate property. There are also general exceptions for inherited or gifted property to remain with one spouse. Whether the law applies to domestic partnerships depends on state law.

Property brought into the marriage in a community property state doesn’t automatically come with rights of survivorship, but you can elect it. In addition to avoiding probate, there can be a tax benefit we’ll discuss later.

What is community property with right of survivorship?

As with joint tenancy, you can pass your property to your spouse without going through probate if you elect “community property with right of survivorship.” Along with the automatic transfer, this unlocks the tax benefit of a step-up in basis, which can lower tax liability.

What’s the difference between community property and equitable distribution states?

Community property and equitable distribution principles may be confused for each other, but they’re very different:

• In community property states, marital assets are split down the middle. Everything is exactly equal.
• In equitable distribution states, things tend to be distributed based on fairness rather than equality. This tends to be decided by judges because fairness can be in the eye of the beholder. But the judge may take into account contribution and how assets were used during the marriage.

Community property

Community property states require the 50/50 split of assets gained in marriage. In other words, assets, debts, and even income become the shared property of the couple after marriage, with a typical exception for inheritances and gifts to one party or the other. This is a legal principle in operation in nine states:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

Alaska residents can opt in to community property during their marriage if they wish.

In cases where community property applies, it impacts not only the way assets are inherited if someone passes away, but also what happens in the event of divorce.

Equitable distribution

States that don’t use community property as a principal for asset division usually use equitable distribution. Judges make a determination in each individual case as to what is and isn’t fair. But fair doesn’t necessarily mean equal. Of course, courts will honor asset divisions that are agreed upon by the parties.

Joint tenants have an automatic right to survivorship. If you hold the property as a tenant in common, your share of the property can be sold, or passed to a designated heir or beneficiary.

Community property vs. community property with right of survivorship

It’s worth spending a little more time on why the right of survivorship might be necessary in community property states where everyone is considered to have equal ownership in marital property. In short, any assets one spouse brings into the marriage belong to the spouse alone. They wouldn’t automatically be inherited by a surviving partner if the spouse passed, absent a will.

Someone wishing to have their partner inherit property brought into the marriage can title the property as community property with the right of survivorship so that the partner can take automatic possession without having to go through probate or deal with claims from anyone else. Let’s run through a couple of scenarios to bring this home.

An example of community property

Max and Casey are married in Arizona, a community property state. Max owned the couple’s home before their marriage. Because the property dates to before they will legally together, it’s not community property. If Max passes first, the home doesn’t automatically transfer to Casey. Casey would have to make an ownership claim as a surviving spouse in probate court, which may be complicated if there are other potential heirs.

An example of community property with right of survivorship

Let’s look at this scenario again, but assume Max and Casey have included a right of survivorship in the title work. If Max passes, the property goes to Casey without anyone having to go to court.

Joint tenancy vs. community property with right of survivorship

Joint tenancy and community property with survivorship would seem to have similar impacts, but if you live in a community property state, it’s to your benefit to take advantage of the ability to do community property with right of survivorship:

• Joint tenancy comes with the automatic right of existing owners to absorb the interest of another owner who has passed
• Community property with the right of survivorship includes all the benefits of joint tenancy with the added tax benefit of an automatic step-up in basis that we’ll detail in a bit.

How does right of survivorship work with a will?

A right of survivorship overrides a will in the event it’s included in the title. With a right of survivorship, the property never becomes subject to probate because the terms of the title automatically transfer the property to the surviving owner. To update the title, a death certificate and other paperwork may need to be filed at the county clerk’s office.

On the other hand, if two people are tenants in common, property share does follow the terms of someone’s estate plan and can be inherited by heirs.

Are there tax benefits for surviving spouses in community property states?

Community property with right of survivorship was initially created to confer a tax benefit. So let’s go over what that is.

Double step-up in basis

When you sell a home, the amount of your taxes owed on the gain or sale is based at least in part on what’s referred to as the taxable basis of the property. This is determined by things like the cost of the home and any dollar amounts you put into capital improvements. The difference between the sale price and your tax basis represents the amount subject to capital gains tax (before exclusions like the one for primary residences).

Things that can be included in your basis are the purchase price or construction cost (including the cost of land) and certain closing costs, along with the cost of improvements made over time.

This matters for title as the basis changes the day property is inherited. If you’re joint tenants and your spouse passes, your spouse sees their basis change to whatever the home value is on the day they pass, which has the effect of decreasing tax liability. But your basis in the home is still whatever it was prior to their passing. You’re each considered to have owned half the home, and the different values have to be added together.

Let’s say you buy a home for $200,000 and 10 years later when your spouse passes, it’s worth $800,000. When you decide to sell 5 years later, you do so for $1 million. What’s your potential tax liability? Here’s the formula:

Sale price - 0.5 × spouse’s adjusted basis on death - 0.5 × original basis on purchase

If we substitute in the numbers, that becomes the following:

$1 million - 0.5 × $800,000 - 0.5 × $200,000 = $500,000

But when you’re in a community property state, IRS rules state that you get a double step-up in basis. This means that both of you see your basis increase to the fair market value of your home should your spouse pass. This further lowers your tax liability.

An example of double step-up in basis

Let’s keep all the facts from the example above the same, but assume that you and your spouse lived in California, a community property state. You took title as “community property with right of survivorship.” So the basis in the property for both spouses becomes what the fair market value was on the date of the first spouse’s passing – $800,000. That makes the taxable value calculation look like this:

$1 million - $800,000 = $200,000

The double step-up in basis in community property states makes the potential tax liability much lower.

The bottom line: Best practices for incorporating the right of survivorship

By electing to take title as “community property with right of survivorship” – or the equivalent language in your community property state, property passes to the surviving spouse without going through probate, saving time and money. In addition to the traditional benefit of avoiding probate that comes with joint tenancy, a step-up in basis available in community property states can lower capital gains tax liability.

If joint tenancy isn’t an option and you still want to avoid probate for your home, you may be able to take advantage of a transfer on death deed or similar estate planning maneuver. Estate planning can be extremely complicated. If you have questions about your own situation, consult an estate planning professional.

For more information on estate planning and your home, read our article on what happens if you have a mortgage when you pass away.