The Best Way For Married Couples

to Hold Title in Arizona

 

By: Dan Kloberdanz

 

This article will discuss the best methods in Arizona for married couples to hold title to real or personal property.  Because Arizona is a community property state, there are more choices for its married residents to hold title than in most other states.

 Generally, setting aside various forms of trusts, there are three methods in which all persons, married or single, may hold title with another person in Arizona:

1)         Tenancy in Common

2)         Joint Tenancy With Right of Survivorship (JTWRS)

3)         Beneficiary Deed

   Amongst each other, married couples can hold title as either community property or as their sole and separate property.  In either case, a married couple can hold title with or without a right of survivorship.  A "right of survivorship" is the term which means that the subject property is automatically transferred to the surviving owner or owners when one of the owners dies.  Fortunately for Arizona residents, the availability of more methods in which to hold title creates certain tax advantages, especially relating to the “stepping up” of a tax basis for community property when one spouse dies.  This article will discuss some of the advantages and concerns for these different types of vesting methods.   Keep in mind that the use of trusts, family limited partnerships, and other similar concepts may also have significant legal and tax consequences, however, the impact of such trusts are beyond the scope of this article. 

I.          VESTING OF TITLE.

1.     Tenancy in Common.

When two or more persons hold title together without the right of survivorship, this is known as a tenancy in common.  A tenancy in common is presumed to exist under Arizona law, unless the parties specifically indicate in the deed the intention to create a right of survivorship.

Tenants in common have the right to devise their respective interest in the property (i.e., they can decide in a will who receives their interest upon their death, or, if there is no will, the heirs will become vested in the joint tenancy interest upon the joint tenant's death.)

2.     Joint Tenancy With Right of Survivorship.  When a “right of survivorship” is created, the property passes to the surviving joint tenant outside of probate.  This is the most desirable aspect of taking title as joint tenancy with the right of survivorship (JTWRS).  In order for persons to create a joint tenancy with the right of survivorship, the deed must expressly state the intention to create a joint tenancy with right of survivorship.  Likewise, if a married couple desires to take title as community property with right of survivorship (a method which is explained below), the deed must specifically state their intention to create such right of survivorship.

3.         Beneficiary Deed.    In 1991, Arizona adopted a law, A.R.S. § 33-405, which creates a new type of deed known as the Arizona Beneficiary Deed. Under a Beneficiary Deed, an owner of real property located in Arizona may provide that the owner's interest in the real property be conveyed to other persons or entities upon the owner's death.  The interest in real property transfers automatically by law to the grantees designated in the Beneficiary Deed.

II.        MARRIED COUPLES AND COMMUNITY PROPERTY.

1.     Community Property.  Under Arizona’s community property laws, a fictitious marital community exists under which each spouse owns an undivided half of the community property estate.  In Arizona, there is a presumption that all property acquired during a marriage belongs to the husband and wife as “community property” and that each spouse has the right to devise (for example, by a will or through a trust) his or her half of the community property.  One of the downsides of holding title as community property without the right of survivorship is that the property must go through probate if one spouse dies, even if the decedent’s half is to go to the surviving spouse.  As explained below, however, there can be substantial tax advantages in holding property as community property.

2.     Sole and Separate Property.  Under Arizona law, sole and separate property is defined as that property which is acquired prior to the marriage, as well as any gifts, bequests or inheritances received by one of the spouses during the marriage.  Keeping one spouse’s property "sole and separate" during a marriage can be a somewhat complicated matter, especially where community funds are used to make payments on the property or to maintain the property. 

3.     Community Property With Right of Survivorship.  In 1995, the Arizona Legislature enacted A.R.S. §33-431, which allows a married couple to hold property interests as “community property with right of survivorship.”  This method combines the survivorship aspect of JTWRS (to avoid probate) with the advantages of community property (the tax step-up in basis explained below).

The husband and wife can create an interest in CPWRS by simply deeding the property to themselves as CPWRS without the necessity of using a straw party.  In the case where only one spouse possesses title, he or she can also transfer the property into CPWRS with one simple deed to both spouses as CPWRS.  When the couple is ready to make the transfer, they should contact their title insurer to make sure that any required procedures are taken (such as acquiring an endorsement) so that their title insurance coverage remains unaffected by the transfer into CPWRS.

The right of survivorship aspect of the married couple's ownership can be terminated by either spouse recording an affidavit entitled “Affidavit Terminating Right of Survivorship” pursuant to A.R.S. §33-431.  Also, if CPWRS is used, the right of survivorship is automatically terminated at the time that the couple’s marriage is terminated by a divorce or an annulment.  On the other hand, if JTWRS is used, a divorce or annulment will not  automatically terminate the right of survivorship.

III.       HOW DOES THE “STEPPED UP” BASIS WORK? 

The community property method of holding title has a significant tax advantage for appreciated property if one spouse should die prior to the time that the property is sold by the surviving spouse.  As an example, let’s assume that a married couple purchased a parcel of raw land for $100,000, the land appreciates to a fair market value of $300,000 when one of the spouses dies.  If the property is held as JTWRS, the surviving spouse will have to recognize half of the taxable gain if he or she were to sell the property for a profit in the future.  For example, if the property were sold for $300,000, the taxable gain to the surviving spouse would be $100,000.  If the property were held as tenants in common, and the property was devised to the surviving spouse, there would also be a taxable gain of $100,000.  Under the same circumstances, however, that spouse would have no gain if the couple had held the property as either community property or as CPWRS.

            Because of the potential tax advantages and the relatively easy procedure to create CPWRS, there is really no reason for a married couple in Arizona to hold title under any other method, unless the couple does not desire to create a right of survivorship. Therefore, all married couples should seriously consider transferring all of their JTWRS property into CPWRS.