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Community Property With Right of Survivorship, Joint Tenancy & Power of Attorney

 

Estate Planning Made Easy

 

A Community Property With Right of Survivorship Agreement is a method to avoid probate in Arizona; however, there are several drawbacks.

A.R.S. § 33-431 (C) and (D) provide as follows:

  • C.  A grant or devise to a husband and wife may by express words vest the estate in the surviving spouse on the death of one of the spouses when expressly declared in the grant, transfer or devise to be an estate in community property with right of survivorship. An estate in community property with right of survivorship may also be created by grant or transfer from a husband and wife, when holding title as community property or otherwise, to themselves or from either husband or wife to both husband and wife.
  • D.  In the case of real property owned by a husband and wife as community property with right of survivorship, the right of survivorship is extinguished as provided in section 14-2804 or on the recordation in the office of the recorder of the county or counties where the real property is located an affidavit entitled “affidavit terminating right of survivorship” executed by either spouse under oath that sets forth a stated intent by the spouse to terminate the survivorship right, a description of the instrument by which the right of survivorship was created including the date the instrument was recorded and the county recorder’s book and page or instrument reference number and the legal description of the real property affected by the affidavit. The recordation shall not extinguish the community interest of either spouse.

A.R.S. § 33-431

The main draw back is that Community Property Agreements do not provide for transfer of control of assets and decision making if you are alive and become mentally unable to manage your financial affairs.  Also, Community Property Agreements do not provide for transfer of assets when both spouses die.  Therefore, often times when the second spouse dies, the children are left to handle an expensive intestate probate proceeding requiring the posting of a bond by the Court and Court supervision.  Therefore, our firm rarely advises clients to prepare a Community Property Agreement because a Revocable Living Trust is a more complete and global solution for their estate planning goals.

Community Property Agreement can only be revoked in writing by the spouses while they are alive or by divorce. Community Property Agreements do not enable the deceased to make gifts to children, grand children, charities or friends. Community Property Agreements do not cover medical decisions, power of attorney, health care directives, or medical mental incompetency management of financial assets.

Description- A community property agreement with right of survivorship is an agreement between spouses regarding the character of their community and separate property. The agreement has the effect of converting all property owned by a deceased spouse into community property, which essentially results in the surviving spouse owning all of the property without the need to go through the probate process.

Advantages- A community property agreement is a simple and effective way to transfer the property of the deceased spouse to the surviving spouse.

Disadvantages- In addition to several negative tax consequences (which can be explained to you by your tax professional), a community property agreement may have other drawbacks. Most notably, a community property agreement may be insufficient to convert all of the deceased spouse’s property (such as certain retirement plans) into community property. Any assets not converted to community property will pass according to the beneficiary designations made by the decedent in addition to the disadvantages set forth above.

Joint Tenancy with Right of Survivorship

A.R.S. § 33-431 (E) & (F) address owning property as Joint Tenants with the Right of Survivorship as follows:

  • E.  In the case of real property owned as joint tenants with right of survivorship, the right of survivorship is extinguished as provided in section 14-2804 or on the recordation in the office of the recorder of the county or counties where the real property is located an affidavit entitled “affidavit terminating right of survivorship” executed by any joint tenant under oath that sets forth a stated intent by that joint tenant to terminate the survivorship right, a description of the instrument by which the right of survivorship was created including the date the instrument was recorded and the county recorder’s book and page or instrument reference number and the legal description of the real property affected by the affidavit. If there are more than two joint tenants, the recordation of the affidavit shall extinguish only the joint tenancy and survivorship right of the person who executes the affidavit, and the joint tenancy and survivorship right shall continue among all remaining joint tenants who have not executed an affidavit of termination.
  • F.  With respect to a deceased joint tenant, the termination or extinguishment by death of that tenant’s joint tenancy with right of survivorship may be evidenced by the recordation of both of the following items in the office of the recorder of the county or counties where the real property is located:
    • 1.  An affidavit executed by one or more of the surviving joint tenants that includes the name of the deceased joint tenant, the date of death of the deceased joint tenant, a description of the instrument by which the right of survivorship was created including the date the instrument was recorded and the county recorder’s book and page or instrument reference number, the legal description of the real property affected by the affidavit, and the cause of death of the deceased joint tenant.
    • 2.  An attached death certificate of the deceased joint tenant.

A.R.S. § 33-431

Description- Joint tenancy with right of survivorship is the co-ownership of property, either real or personal, between the decedent and another person. Upon the death of the decedent, the co-owner becomes the sole-owner.

Advantages- There is no need to use the probate process to transfer property held in a joint tenancy.

Disadvantages- Property held in a joint tenancy is considered a non-probate asset; however, joint tenancy property is subject to the claims of creditors. In addition, the heir who receives full ownership of property held in a joint tenancy may lose several tax advantages.

A common question I receive is “What is owning property as joint tenants with right of survivorship?” Usually this comes with the question: “Can’t I just add my children’s’ names to my property and avoid probate?”

This is a great example of doing somewhat easy but creating multiple problems that may be very costly in the long run.

Joint tenancy with right of survivorship is the co-ownership of property, either real or personal, between two or more people. Upon the death of a joint tenant, their ownership interest is extinguished and the remaining joint tenant then owns 100% of the property.

Does this method avoid probate? Sure. But, there are multiple problems with this approach.

First, you no longer own 100% of the asset. Therefore, You are no longer in control. You can’t sell it, change your mind or obtain financing secured to the property without the consent of the other joint tenants.

Second, if something happens with one of the other joint tenants such as a divorce, bankruptcy or judgment entered against them, then your property is now affected because they own the property along with you.  This creates a substantial risk to you.

Third, your beneficiaries lose the tax benefit of acquiring the property through a trust or probate after your death on a “stepped-up tax basis.”

Here’s the deal. When you give a gift during your lifetime, the donee acquires the property at the donor’s tax basis.  For example, if you bought a house a long time ago for $80,000 and the house is now worth $300,000 and  you now decide to put your children on title as a joint tenant with right of survivorship, their tax basis in the property would be $80,000 instead of $300,000. If you die and they then decide to sell the house, they would pay capital gains tax on the $220,000 difference.  At a 15% tax rate, that means they would have to pay $33,000 in taxes.

However, if you set up a trust and transfer the house into the trust, you accomplish your goal without the risk.  You still control the asset and you can do whatever you want with it. The actions of your beneficiaries have not affect on your property and third when you leave property to beneficiaries through a trust at the time of death, your beneficiaries acquire title to all assets on a “stepped-up” tax basis valued date of death.

So, in the example if you leave the house to your beneficiaries at the time of your death and it is worth $300,000, then your beneficiaries acquire the asset valued at the time of death i.e. $300,000 and if they turn around and sell it, then the beneficiaries would pay $0 in capital gains tax.  Thus you have conveyed an extra $33,000 in wealth to your beneficiaries simply by setting up a Trust.  Plus you have eliminated all of the risks associated with owning the property as joint tenants with right of survivorship.

The purpose of Estate Planning is to have Peace of Mind knowing that you have a plan in place to handle whatever comes up during your life time. I offer a Free initial consultation over the phone or by video conference. If you have any additional questions, please send me an email with your questions.

Power of Attorney

Description- A power of attorney is a grant by one person to another person to act in their place for a particular purpose. For example, a special power of attorney can be used if you want someone else to be able to sell your house because you will be unavailable to sign sale documents. A durable power of attorney can be much broader an grant another person the authority to maintain and manage your finances and make medical treatment decisions for you in the event that you are incapacitated.

Advantages- A power of attorney can be tailored to your specific needs and wants with regard to granting another person the authority to act on your behalf.

Disadvantages- A power of attorney alone is an insufficient method of estate planning because the grant of authority in a power of attorney ends with the death of the decedent.

 

For a little bit of time and money, you can create a comprehensive Peace of Mind Planning package that is effective now, will remain in effect in the event you become mentally unable to handle your financial matters and save your family and friends the heartache and hassle of cleaning up your affairs. Please click this link to watch our videos on Peace of Mind Planning.

Over the past 24 years, I have helped over 900 clients prepare and utilize simple and effective planning techniques to protect them and their families in order to avoid probate, save estate taxes, save money and save added emotional burden that comes from long term illness and/or death of a family member. Give us a call to schedule a free consultation to find out how we can help you and your family.


Law Offices of Christopher A. Benson, PLLC
60 E. Rio Salado Parkway, Suite 900 – Tempe, AZ 85281
(602) 892-4682 | Map | Reviews