Community property with right of survivorship

Community Property With Right of Survivorship in AZ

Arizona is one of the minority of states recognizing the concept of community property. In Arizona’s version, though, most real estate owned by spouses for many years was titled as joint tenancy with right of survivorship. Why? Because Arizona did not recognize community property with right of survivorship until 1995.

Is Community Property with Right of Survivorship better?

Generally speaking, married couples owning property together should probably favor community property over other options. Why? Because if one spouse dies, the property value gets “stepped up” for income tax purposes. That can mean real tax savings after death of one spouse.

Both community property with right of survivorship and joint tenancy with right of survivorship work the same way for one important purpose. Both avoid probate requirements after the death of one co-owner. Before 1995 — in Arizona, at least — married couples had to choose. Did they prefer probate avoidance, or income tax basis step-up?

Since the real estate owned by most couples is limited to their residence, they already get favorable income tax treatment. So right of survivorship was generally seen as more important than the community property choice. Then the Arizona legislature got smarter, and let Arizona married couples have both at once. That made community property a “better” choice for most jointly-owned property between spouses — and the change was immediately popular.

Other community property states had different rules, or have followed different paths. California seems to have followed Arizona’s lead a few years later, in 2001.  Texas adopted a similar provision in 2005, but seems to require a separate agreement between spouses. We mention this only because we want to make clear: we don’t know very much about the law of other states. So check with a lawyer in your own state before assuming the rules might be the same.

The history of joint tenancy

Centuries of experience with the right of survivorship concept in joint tenancy property ownership have given us some understanding of the rules. One joint tenant can “terminate” the right of survivorship unilaterally. They do that by transferring their interest — even if they transfer it to themselves.

Why should that work? Because joint tenancy has long required that the joint tenants’ interests are identical, and acquired at the same time. So if Pat and Terry own property as joint tenants, and Pat signs a deed transferring their interest to themself — the two joint tenants’ interests have different start dates, and the right of survivorship is lost. Terry doesn’t have to agree, and might not even know it happened.

But what about community property with right of survivorship? Can one spouse unilaterally terminate the right of survivorship?

Yes. Arizona law provides a straightforward way to terminate the right of survivorship. Arizona Revised Statute §33-431(D) says one spouse can sign and record an affidavit to that effect. But is that the only way to accomplish the result?

Manuel Hernandez takes a different approach

In 2003, Manuel and Carol Hernandez bought a home just outside Bullhead City, Arizona. They took title as community property with right of survivorship. Then, in 2020, Manuel apparently decided he didn’t want his wife to receive his share of property upon his death.

Manuel signed a new will, leaving everything to the couple’s granddaughter, Tiffaney Knight. He also signed a deed transferring his interest in the residence to — himself! Then he signed a beneficiary deed, which would transfer his interest to Tiffaney automatically upon his death.

When Manuel died a few months later, his widow (Carol) had already been determined to be incapacitated. Tiffaney became guardian (of the person) and conservator (of the estate). Soon, Tiffaney saw that there would be a conflict in her asserting the claim against her grandmother’s estate, and a private fiduciary was appointed in her place. The rest of the litigation was between Carol’s conservator (Mohave Estate Management Office) and Tiffaney.

Court proceedings

The probate court in Mohave County decided that Manuel’s deed to himself terminated the right of survivorship in the home property. And his beneficiary deed transferred his one-half interest to Tiffaney automatically. Tiffaney was now owner of a half interest in the home, and Carol (through her estate) owned the other half.

But wait, argued Carol’s conservator. Community property is different. One spouse can not transfer community property unilaterally, and Manuel didn’t follow the statute anyway. Carol’s conservator appealed the probate court judgment.

In an unreported (memorandum) decision, the Arizona Court of Appeals upheld the probate court’s determination. The statute spelling out how to terminate a right of survivorship on community property is not exclusive. By analogy, the same kind of deed-to-self that works for terminating joint tenancy would work for community property with right of survivorship, too.

Furthermore, Manuel wasn’t transferring community property when he signed his beneficiary deed to Tiffaney. He was transferring his own interest in the community property, and that is permissible. Knight v. Hernandez, September 13, 2022.

What’s the takeaway?

Remember that the Knight decision is not a reported appellate decision. Because it is not, it can not be used as precedent in other court cases. But it still seems to confirm what most practitioners have long believed — that community property with right of survivorship has a lot in common with the right of survivorship inherent in joint tenancy.

Also remember that this is an Arizona case, interpreting Arizona law. If you have a community property with right of survivorship issue in one of the other community property states, it might or might not play out the same way. Always get your individualized legal advice from a qualified attorney practicing in your state.

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