How Does Right of Survivorship Work?
Rights of survivorship are a common means through which property can be passed between family members and business partners after death. Like other forms of posthumous transfer, survivorship confers a number of important rights. However, it has its own share of limitations and drawbacks. Those who wish to set up a survivorship arrangement with spouses, family members or business partners would do well to understand the mechanisms that govern this area of the law.
What Is a Right of Survivorship Deed?
A right of survivorship deed outlines the transfer of a share of jointly held property from a recently deceased owner to the surviving owner or owners. These agreements are designed to preserve ownership within a specific and exclusive group of individuals or entities. Although they're most often invoked by surviving spouses who had owned individual real estate parcels as "community property" with their recently deceased romantic partners, survivorship deeds are often used between groups of joint tenants to enforce the equitable distribution of deceased tenants' ownership interests.
Do Estate Taxes Apply?
Estate taxes generally apply to survivorship arrangements. If a given property is large enough to qualify for an estate tax hit, the surviving owners are generally held liable for proportional shares of the bill. It follows that surviving spouses must pay estate taxes as well. However, it's important to note that the survivorship arrangements confer increased ownership shares in real property. As such, their financial benefits almost always outweigh the demands of the estate tax. Moreover, the estate tax exclusion limit is currently set at $5 million and covers a tiny fraction of U.S. properties.
Community Property vs. Separate Property
Generally speaking, rights of survivorship only apply to community property. This has special relevance for arrangements between spouses. Spouses who bring separate real property holdings into a marriage are not automatically required to transfer these assets to their surviving partner. Although the definition of jointly held property is a bit broader in so-called community property states like Colorado and California, spouses with separate property holdings enjoy substantial freedoms in all 50 states. On the other hand, rights of survivorship generally apply to jointly held properties by default. Spouses must decide whether to change this de facto arrangement on a case-by-case basis.
Tenancy in Common vs. Joint Tenancy
Whereas rights of survivorship almost always apply in joint tenancy situations, they usually don't have relevance for tenants in common. This is a key distinction between these two forms of property ownership: Whereas a consortium of joint owners can divide deceased members' shares equitably among survivors, tenants in common have no legal framework through which to accomplish this. Indeed, tenants in common are free to distribute property shares to their heirs as they see fit. As such, business partners who wish to ensure continuity or exclusivity of ownership are advised to use joint tenancy arrangements.
Alternatives and Unsuitable Scenarios
There are many reasons to avoid the use of survivorship deeds. Individuals who wish to bypass their spouses and transfer property directly to their descendants must necessarily eschew survivorship deeds, and business partners who wish to enrich their heirs should work out tenancy in common arrangements or add non-survivorship stipulations to their joint tenancy contracts. It's important to note that positive action is generally required to avoid survivorship transfers under "default" state laws.
Final Thoughts: Useful in Certain Circumstances
While rights of survivorship are quite common, they're not appropriate in all situations. Those who wish to divide property equitably in the aftermath of a principal owner's death have no need for rights of survivorship, and tenants in common are legally forbidden from enjoying survivorship. Current or prospective property owners who remain unsure about the relative benefits and drawbacks of this arrangement should speak with a qualified legal professional.