Estate Planning: Forms of Property Ownership (Module 2)

What are three types of property ownership that avoid probate?

- JTWROS - beneficiary designation - trust prior to death

Which of the following states has some form of community property law? 1. Idaho 2. Rhode Island 3. California 4. Arizona

1, 3, 4 Consequently, the term "community property" does not mean exactly the same thing in each of the nine states that have some form of community property laws. Indeed, to this day the courts continue to refine the concept. The states which have some form of community property law are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Maureen is studying up on property titling as part of planning for her estate. Which of the following statements are true about the destination of her assets in the event of her death? Please select all that apply. 1. Her mutual fund accounts held as joint tenant accounts with her children will go directly to them. 2. Her house that is held in tenants by entirety would go to her children through probate. 3. Her interest in the winter cabin held in tenants in common with her sisters would go to them by right of survivorship. 4. Her summer home left to her alone from her mother would go through her probate estate.

1, 4 Maureen's house held in tenants by entirety would be left to her widower. Her summer home she owned by herself and her winter cabin held in tenants in common will become part of her estate. Finally, her mutual fund account interests would go to the surviving joint tenants.

When would individual ownership be appropriate? Please select all that apply. 1. If an owner wants to retain ownership, but lets others enjoy and use the property 2. If an owner has a small estate 3. If owner does not desire control over the property 4. If owner wants absolute control over the property

2, 4 Individual ownership is appropriate if the owner wants absolute control over the property. It is also appropriate for those individuals with estates not large enough to be subject to estate tax.

Jean, Janet, Linda and Laurie inherited a house from their sister as tenants in common. Jean passes away a year later. Who will receive Jean's interest in the house? a. Jean's Estate b. Janet c. Linda d. Laurie

A In tenancy in common, the interest of any owner is passed on to the heirs through the estate upon the owner's death. In this case, Jean's interest in the house is passed on to her estate. If the ownership had been a joint tenancy, then Janet, Laurie and Linda would have received Jean's interest upon her death.

John and Elizabeth are married and are residents of Nevada. John is software professional and is the only earning member in the household. They buy property with John's money. After ten years of marriage, John files a divorce. Elizabeth claims and gets a share of the property, after the divorce. State True or False. a. True b. False

A Nevada, being a community property state, follows the principle that even if only one of the spouses is the income earner, the efforts of the non-working spouse contributed to the purchase of the marital property.

Probate assets are those assets that are individually owned by the decedent at death. State True or False. a. True b. False

A Probate assets are those assets that are individually owned by the decedent at death, that is, solely owned assets, interest in tenancy-in-common assets, interest in community property, or beneficiary designation assets, such as life insurance, where the owner's "estate" is named as the beneficiary.

Receiving a Life Estate

A person who is given a life estate in property has control and use of the property throughout their life, but they cannot chose the beneficiary of the property at their death. This lack of control means that the value of the property will not be included in the life tenant's estate at death. If a spouse is given a life estate in property, the marital deduction cannot be used (in the absence of a Q-TIP election) by the donor or the decedent's executor to offset a gift or estate tax liability.

Life Estate

An owner of property can create a life estate for themselves or give a life estate to another person. A person who has a life estate in property or in a trust, has the right to live in the property for life, or has the right to receive all income from the trust for life. A remainder beneficiary will receive the entire property interest after the life tenant's death. Unlike a trust, the remainder beneficiary has an immediate vested interest in the property. For example, a remainderman can sell or give away the property without the consent of the life tenant. However, a buyer would have to wait for the death of the life tenant to actually use the property.

Community property

Any property acquired in certain states by purchase, or as compensation by either spouse during the period of marriage, is considered to be owned in an undivided half interest by each.

What are the community property states?

Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

A state that is known as a community property state is one in which all property owned by married people in that state is deemed to be community property. a. True b. False

B Just because a state is known as a community property state does not mean that all property owned by married couples in that state is deemed to be community property. It is possible for some to be owned by him, some to be owned by her, some to be owned jointly with rights of survivorship and some to be owned as a community property.

Mr. and Mrs. Murphy are contemplating purchasing a new home. When presented with property titling options, which of the following statements are true? a. If Mr. Murphy left his interest of tenancy by the entirety to a testamentary trust, then his interest would go to the trust. b. With tenancy by the entirety, they do not have to worry about creditors forcing sale on the house from the debt of either spouse. c. As joint tenants, if one spouse passes away, his or her interest will go through probate.

B Tenancy by the entirety protects the property from forced sales (levy) to compensate for default on a loan by either spouse. If the Murphys bought the house as joint tenants with right of survivorship or as tenants by the entirety, in the event of one owner's death, the property automatically passes to the surviving spouse, not through probate.

Husband and wife are co-managers of their community property. If the wife dies and bequeaths her half of the community property to her children, both the husband's and children's property interests will receive a step-up in basis to FMV at the wife's death. a. False b. True

B The wife's one half ownership of community property is included in her estate, and will receive a step-up in basis when the children inherit her share. The husband's one half of the couple's community property will also receive a step-up in basis at his wife's death.

Harry Ford and his wife own property jointly with right of survivorship (JTWROS). His wife transfers her interest in property to him and then he set up JTWROS with his business partner. Is Harry allowed to do this? a. No b. Yes

B There is a common tendency for people to believe that a joint tenancy with right of survivorship only exists between spouses. But the fact is that it can be stretched to accommodate parent and child, brother and sister, and business partner and business partner.

According to IRC section 2040(a), except for joint tenants who are husband and wife, unless the surviving owner can prove contribution toward the purchase of the asset, what percentage value of jointly held property will be included in the gross estate if the first owners die? a. 20% b. 100% c. 50% d. 10% e. 80%

B Unless the surviving owner can prove contribution toward the purchase of the asset, the full value of jointly held property will be included in the gross estate if the first owners die

What percentage of the assets value on the date of death will be included in the owner's gross estate after death? a. 50% B. 80% C. 100% D. 10%

C 100% of the assets value on the date of death will be included in the owner's gross estate after death

After a divorce, Cecilia opened an account for herself at a local bank under her own name. She became afraid that her ex-husband would be able to access her account without her approval. Which of the following points would you make to Cecilia to clarify how her single account works? 1. Cecilia should be worried about her ex-husband gaining access to her account 2. The bank should not perform any transactions without Cecilia's approval 3. Someone whom she granted permission to through power of attorney can make transactions from her account 4. Cecilia's ex-husband has equal ownership to her account

Correct Answer: 2, 3 Explanation: One benefit to owning assets as a single owner is the ability to maintain sole control over the assets. Cecilia is the only person who can request transactions for the account. If she grants the power of attorney to someone, that person will have the authority to make transaction requests on her behalf.

Peter and his wife titled their home as JTWROS. When his wife died the property avoided probate. Peter as sole owner wants to avoid probate again and continue to live in his home for life. Therefore he changed his deed to create a life estate in the home, and gave his son the remainder interest. What are the gift tax consequences of this transaction? 1. There is no gift tax due because the son will not receive the property until Peter dies. 2. Peter has made a gift to his son for the present value of the remainder interest in property. 3. Peter can take an annual exclusion to offset the gift tax liability on the remainder interest gift. 4. Peter has made a gift to his son of the fair market value of the home when he changed the deed.

Correct Answer: 2. Peter has made a gift to his son for the present value of the remainder interest in property. Explanation: When Peter changed the deed, he made a gift to his son of the present value of the home's remainder interest. This is less than the home's current fair market value. The gift of the home's remainder interest is a future interest gift, so annual exclusions do not apply. Annual exclusions reduce the taxable amount of present interest gifts.

Under which property law is the property equally divided between the spouses as a result of death or in the case of divorce? A. Community property B. Joint property C. Separate property D. Common property

Correct Answer: A. Community property Explanation: Community Property is any property acquired by the spouses in the course of their marriage. The property is divided equally between them if they divorce, or in the case of death of one of the partners.

A disadvantage of tenancy by the entirety property is that it may "over-qualify" the estate for the marital deduction. A. True B. False

Correct Answer: A. True. Explanation: The decedent spouse includes ½ of the FMV of the tenancy by the entirety property in his gross estate which is subject to the marital deduction. This means the decedent's applicable credit is not used to offset the estate tax liability, and the decedent's estate is "over-qualified" for the marital deduction.

John Nash and his wife Susan Nash are joint owners of a property. Susan can terminate the ownership without John' permission. A. True B. False

Correct Answer: A. True. Explanation: The joint property law does not require the consent of all joint tenants before termination. One JT can change property to tenants in common without the other JT's consent. For property owned as JTWROS between spouses, it's a good idea to get the spouse's signature on a deed transfer form to avoid having the JT spouse assert survivorship rights on property sold to a third party.

Carol, Ann, and Barbara hold one-half, one-third, and one-sixth interests respectively in a farm. They all share an undivided interest in the farm. What type of ownership applies to this situation? A. Joint Tenancy B. Tenancy in Common C. Single Ownership D. Single Tenancy

Correct Answer: B. Tenancy in Common Explanation: Since each owner shares an undivided interest, even though each owns an unequal share, this is considered a tenancy in common. In a joint tenancy each owner has a simultaneous, equal share of the entire property. It is not single ownership because there is more than one owner. It is not tenancy by the entirety because the property is not owned by husband and wife.

A wife bought stock ten years ago for $10,000 which is now worth $100,000. She gifts her husband half in a tenancy by the entirety account and dies four months later. The husband sells the stock at her death for $100,000. What amount is subject to capital gains tax? A. $10,000 B. $100,000 C. $50,000 D. $45,000

Correct Answer: D. $45,000 Explanation: When the husband received the gift of stock, his basis was deemed $5,000. He inherited his wife's stock with a stepped-up basis of $50,000. His new basis is $55,000, therefore $45,000 is subject to capital gains taxes on the sale of the stock.

Rob and Mary, who are cousins, bought property together two years ago for $80,000. Rob paid $60,000 and Mary paid $20,000. When Rob died last month, the FMV of the property was worth $120,000. What amount was included in his gross estate? A. $30,000 B. $60,000 C. $80,000 D. $90,000

Correct Answer: D. $90,000 Explanation: $90,000 is included in his gross estate based on the fractional interest rule. Since Rob contributed ¾ of the original purchase price, then ¾ of the FMV of the property, or $90,000 is included in his gross estate.

A co-ownership discount is a feature of: A. Sole Ownership B. Joint Tenancy with Right of Survivorship C. Tenancy by the Entirety D. Tenancy in Common

Correct Answer: D. Tenancy in Common Explanation: When the different tenants in Tenancy in Common, have conflicting interests regarding the sale of the common property and do not agree to the sale, the property gets a discount in valuation. This is referred to as a co-ownership discount. This discount is not available in the case of Sole Ownership, Joint Tenancy with Right of Survivorship and Tenancy by the Entirety.

Lifetime control and postmortem control of property interests are characteristics of property held in: 1. Tenancy in Common 2. Sole ownership 3. Joint tenancy with right of survivorship 4. Tenancy by the entirety

Correct Answers: 1, 2 Explanation: The most important feature of sole ownership and ownership of property titled Tenancy in Common is that the individual has total control over their property interests both during lifetime and upon death.

Which of the following constitute grounds for the partitioning of a tenancy by the entirety? 1. Consent of both parties 2. Divorce 3. Act of the husband 4. Act of the wife

Correct Answers: 1, 2 Explanation: The tenancy by the entirety cannot be partitioned except with the consent of both parties or through divorce. A tenancy by the entirety cannot be severed by the act of a single spouse.

Cecilia owns her home as a single owner. She is also a sole proprietor of a business that defaulted on its debt. What can the creditors do to Cecilia? 1. Force her to liquidate the home to pay off the debt 2. Nothing to her property 3. Place a claim on her home

Correct Answers: 1, 3 Explanation: If Cecilia defaults on her loans, the creditors may levy or place a lien on property owned by her or property she owns as joint tenants with others.

Tom's will gave his wife Mary a life estate in his Italian villa at his death in 2019. His executor did not elect to use the Q-TIP election. What are the estate tax consequences for Tom's estate? 1. The FMV of the villa is included in Tom's estate but the estate tax marital deduction is not available to offset the estate tax liability. 2. The FMV of the villa is included in Tom's estate but it is offset by the estate tax marital deduction. 3. The FMV of the villa is included in Tom's estate, but since Mary is his wife, she has a general power of appointment over the property.Therefore, the estate tax marital deduction will offset the value of the villa in Tom's estate. 4. The FMV of the villa is included in Tom's estate but his applicable credit amount is available to offset any estate tax liability.

Correct Answers: 1, 4 Explanation: Tom has given Mary terminable interest property that does not receive a marital deduction in his estate, to reduce the value of his taxable estate in 2018. Tom can use his applicable credit amount to reduce any estate tax liability. Mary does not automatically receive a general power of appointment over the property since it must be given to her expressly in Tom's will. If the executor had made a Q-TIP election, the marital deduction would have been available to Tom's estate.

Jennifer, Michelle, Tom and Heather own a summer home as joint tenants. Tom passes away. Who will receive Tom's interest in the summer home? 1. Tom's Estate 2. Jennifer 3. Michelle 4. Heather

Correct Answers: 2, 3, 4 Explanation: Joint tenant ownership comes with the right of survivorship. This means that in the event that one of the owners passes away, the other surviving owners of the property would receive the decedent's interest. In this case, Jennifer, Heather and Michelle would receive Tom's JT interest in property that was included in his estate.

Separate property is: 1. Property acquired after marriage 2. Property acquired through gift after marriage 3. Property acquired prior to marriage by either spouse 4. Property acquired through inheritance after marriage

Correct Answers: 2, 3, 4 Explanation: Property acquired prior to marriage remains separate property, even after marriage. Property acquired as gift or inheritance even after marriage retains the status of separate property. But property acquired by either or both of the spouses themselves is deemed to be community property, unless titled otherwise.

Which of the following is/are similarities between JTWROS property and tenancy by the entirety property? 1. Property passes by operation of law. 2. Property avoids ancillary probate if located out of state. 3. Property may be attached by joint creditors. 4. Property title is considered a will substitute.

Correct Answers: A., B., C. and D. Explanation: All answers are correct.

Which of the following financial planning components can help with the transferring of Cecilia's property held as single ownership in the event that she passes away? A. Investment Planning B. Insurance Planning C. Retirement Planning D. Tax Planning E. Estate Planning

Correct Answers: E. Estate Planning Explanation: Estate planning will help Cecilia make the right decisions about her property ownership in preparing for the transfer of her assets upon death. The other components of financial planning will support other financial decisions.

A mother re-titles the deed to her home as JTWROS with her son. What are the consequences of this action? 1. The mother made a gift of ½ of her home to her son. 2. When the mother dies, 100% of the FMV of the home will be included in her estate, but she can use her unified credit amount to offset up to $5,430,000 in value, in 2015. 3. If the mother becomes incompetent, her son can sell the home to pay for her medical care. 4. If the mother is sued, her creditors cannot reach her son's JT interest. 5. When the mother dies, her executor cannot sell the house to pay her estate taxes but a unified credit of 2,117,800 is available to offset up to $5,430,000 in estate taxes.

Correct Answesr: 1, 2, 5 Explanation: The mother made a gift of ½ of the FMV of her house to her son when she gave him ownership of the property. If she is sued, creditors can place a lien on the home and reach her son's interest. If she becomes incompetent, her son cannot sell her JT interest in the home without obtaining court approval. When the mother dies, the house passes automatically to her son and is not available to her estate. The full FMV of the home will be included in her estate but is offset by her unified credit amount. The son will receive a full step-up in basis at her death.

If a couple living in a community property state acquires an asset and then moves to a non-community property state, what happens to the property?

Even if the couple moves to a non-community property state, any asset acquired during marriage while living in a community property state retains its community status.

How is income taxed in JTWROS?

For example, any income from income-producing property that is held in joint tenancy with right of survivorship will be split equally among all of the joint tenants. Therefore, if the property produces an annual income of $18,000 and is owned by two joint tenants, each tenant will report income of $9,000. While this would be of no consequence to a husband and wife who file a joint income tax return, this could be an effective means of splitting/shifting income between joint tenants who are not married.

If either spouse acquires the property by gift or inheritance how would this property retain its status?

If either spouse acquires the property by gift or inheritance, this property retains its status as separate property even throughout the marriage

If happens if the property in a life estate is sold before the life tenants death?

If the property is sold before the death of the life tenant, a portion of the gain is taxed to both the life tenant and the remainderman. The life tenant's gain qualifies for the $250,000 capital gains exclusion but the remainderman's gain does not. If the property is not sold, the remainder beneficiary will receive the property with a full step-up in basis at the life tenant's death.

How changing an individual asset to a JTWROS asset work with the gift tax?

In the case of a gift tax treatment of an individually owned asset that is changed to a right of survivorship asset if the added joint owner is a spouse, no gift tax liability will ever result (unless the spouse is a non-U.S. citizen) because of the unlimited marital deduction for gift tax purposes. However, if the new owner is a non-spouse, and the property is cash or securities, no gift is made upon the creation of the JTWROS account. However, if the non-spouse joint owner takes a withdrawal from the account, the value of the withdrawal will constitute a gift. However, if the property is real estate, the contribution rule will also apply for gift tax purposes.

For example, a father and son bought a vacant lot together for $80,000 and titled the property JTWROS. The father paid 80% or $64,000 and the son paid 20% or $16,000. When the father died in 2019 the lot was valued at $200,000. What's the sons basis?

The father's gross estate included 80% of $200,000 or $160,000. The son received his father's JT share of the property and now has sole ownership of 100% of the property. The son's new basis is $176,000, based on his original basis of $16,000 plus his father's share of property that was stepped-up in basis to $160,000.

Are individually owned assets subject to probate?

Yes they're probate assets

For community property interests, what would be included in a decedents estate?

a decedent's gross estate would include one-half of the value of a residence, stocks, bonds, personal property, retirement plan assets and IRAs. It would include one-half of the death benefit proceeds of a life insurance policy obtained on the life of one of the spouses since the policy and premiums were paid with community property assets. The estate would also include one-half of the cash surrender value of a life insurance policy held on the life of a third party. Community property that is titled in one spouse's name is not treated as separate property therefore one-half will be included in the decedent's estate.

fractional interest rule

for non-married joint owners. Upon the death of the first owner, the IRS assumes that the decedent made a 100% contribution toward the purchase of the asset. Unless the surviving owner can prove actual contribution toward the purchase of the asset, 100% of the value of the jointly owned asset will be included in the decedent owner's estate. This is known as the fractional interest rule. Basically, this rule provides, when the surviving non-spouse owner of a jointly owned asset can prove contribution toward the purchase of the asset, only the value of the property correlating to the decedent's original contribution will be included in the decedent's gross estate.

tenancy by the entirety

is a specialized form of joint tenancy with right of survivorship existing between co-tenants who are husband and wife. The estate is based on the common law concept of "spousal unity" - that husband and wife are one person. Common law, therefore, dictates that a transfer of property to husband and wife results in only one estate, an entirety. In this estate, the spouses own the whole interest collectively, but no undivided individual share.

Quasi-community property

is property acquired by spouses while residing in a common-law state, which is treated as community property after they move to certain community property states; such as California, Arizona, Idaho, Washington and Wisconsin.

automatic survivorship feature of JTWROS

means that the decedent's interest in the property is not controlled by the terms of his or her will. Rather, such property passes automatically to the surviving owner(s) regardless of the terms of the will.

The primary reason in holding property in tenancy by the entirety would be to _____________ the interests of both spouses in the property - not allowing one spouse to unilaterally exercise control over the form of property ownership

safeguard

For example, if a husband and wife owned community property that was valued at $600,000 at acquisition, and was valued at $1 million at the wife's death. What is included in wife's gross estate? What is husbands new basis?

then $500,000 will be included in the wife's gross estate. The husband will receive her half of the property with a new basis of $500,000 and his original basis in the property of $300,000 will be stepped-up to $500,000. The husband now owns 100% of the property with a new basis of $1 million equal to the property's FMV at the date of his wife's death.