Module 2 - Forms of Property Ownership

Characteristics of TBE

- only husband and wife may hold the property - can only be severed with the consent of both spouses or by divorce - property will receive a stepped-up basis in the decedent's half of the property that is included in the gross estate. the surviving spouse will acquire the decedent's new stepped-up basis but will not receive a step-up in basis for the 1/2 share of property he/she owned

Systems of Marital Property

1. Common Law Property 2. Community Property

Three types of property ownership that avoid probate

1. assets jointly owned with rights of survivorship 2. assets transferring under a beneficiary designation 3. assets owned within a trust prior to death

Quasi-Community Property

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. This occurs only if the couple's common-law property interests would have been considered community property had they originally acquired it in a community property state.

Classification Presumptions for Community Property

- all property acquired during the marriage is presumed to be community property - this presumption can be overcome by clear and convincing evidence presented by the party seeking to claim the property as separate - if separate and community property are mixed so that it is no longer possible to determine which is which, the property will be treated as community - if established as separately owned, it will retain this characterization until clear and convincing evidence is presented that establishes that the property is no longer separately owned - 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

Advantages of TIC

- tenants can split income among themselves - provides a readily available and convenient means of transferring the interest in the property - can reduce the value of the asset so held for estate tax purposes - can serve as a means of transferring the property to an intended beneficiary under the will - allows planes to do effective estate tax planning for spouses

Advantages of Individually Owned Assets

1. easiest form of property ownership 2. provides owner with absolute control over the property 3. owner of the asset can reap any financial benefits associated with the property 4. generally only attachable by the creditors of the owner of the asset, no one else 5. allows client and planner the opportunity to create an estate plan which can minimize estate tax liability

Forms of Property Ownership

1. individual or separately owned property 2. joint tenancy with right of survivorship 3. tenancy by the entirety 4. tenancy in common 5. life estates

Primary Characteristics of JTWROS

1. several individuals own the property together. the control, ownership and enjoyment of the property are shared equally by all of the joint tenants 2. upon death of the first owner, the property immediately passes to the surviving owner(s) in equal shares 3. decedent's interest in the property is NOT controlled by the terms of the will 4. property is excluded from the probate estate of the decedent, but it is still included in the gross estate for estate tax purposes 5. a joint tenancy may be terminated unilaterally by any one of the joint tenants

Reverse Gift

A person with a low basis in property, such as stock, may want to gift their appreciated property to someone who is dying, to receive the property back with a new step-up in basis when the donee dies. However, this tactic will not work if the decedent received the property from the donor within one year of death.

Creating a Life Estate

A property owner can create a life estate for themselves and gift the remainder interest of their real property to someone else simply by changing a deed. The owner would continue to use and enjoy their real property or receive all income from a trust for life, and would control who the property passes to at their death without needing a will. Real property transferred by life estate avoids probate, and all the costs and delays associated with that process. When an owner creates a life estate the owner is gifting the remainder interest of the property to a chosen beneficiary. The present value of the remainder interest is subject to gift tax, and the owner cannot use their annual exclusion to offset the tax on this future interest gift.

Tenancy by the Entirety (TBE)

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. With the modern erosion of the concept that husband and wife are one, most states have abolished this form of property ownership. - upon death of the first spouse, the property automatically passes to the surviving spouse without a will and outside the probate process

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. A life tenant cannot be forced to move out regardless of the misfortunes of the remainder beneficiary but they are responsible for paying property taxes and homeowner's insurance on the property or the remainder beneficiary can sue. 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

Receiving a Life Estate

If you receive a life estate in property by gift or inheritance, you have the immediate right to possess, enjoy or derive income from the property while you are alive. At your death your interest in the property ends, and the property will not be included in your gross estate. The owner of the property who transfers the life estate to you is subject to gift taxes for the present value of your property interest. The value of your interest is determined by actuarial tables that include your life expectancy, the fair market value of the property and the prevailing federal interest rate at the time the gift is made. Since a life tenant has a present interest in the property, the owner can take an annual exclusion to reduce their gift tax liability. The owner of the property will determine who the beneficiary of the property will be upon your death. When the owner transfers the life estate to you, he or she chooses the ultimate beneficiary of the property at that time. Therefore, a gift is made to the beneficiary as well. The value of the gift is based on the present value of the beneficiary's remainder interest in the property or the trust. This is a gift of a future interest since the beneficiary cannot receive the property until the life tenant's death. Therefore the owner cannot take an annual exclusion to offset the gift of property to the remainder beneficiary. If the owner bequeaths a life estate in property to a spouse, the owner cannot receive an estate tax marital deduction for the value of the life estate transferred. The reason is that the life estate is considered terminable interest property. Terminable interest property means that the spouse's interest will end at death and the spouse has no control over the distribution of the marital property upon their death.

Estate for a Term of Years

Someone who receives an estate for a term of years is given the right to use the property or receive the trust income until the term ends. If you die before your term has expired, your will can appoint another tenant to use the property or receive the income until your term officially ends. If you do not have a will, or did not plan for this event, the remainder of your term interest will pass through intestacy.

Asset Classification for Community Property

Unless the spouses agree otherwise, if property was acquired as separate property by either spouse prior to the marriage, it retains its status as separate property even after the marriage. However, the parties may agree to classify it otherwise. If the spouses acquire the property at any time subsequent to the marriage, it is presumed to be community property unless the couple specifically titles the property in some other form of ownership. However, in the absence of an agreement or in the absence of acquiring the property with only separately owned assets, all the property acquired during the course of the marriage is classified as community property.

Probate Property

Upon settlement, the probate court will distribute appropriate property interests to the decedent's heirs according to the owner's will. If there is no will, property is distributed according to the state's intestacy laws. Administrative expenses and attorney's fees are frequently calculated as a specific percentage of the decedent's probate estate.

Individual or Separate Ownership

also called sole ownership or fee simple property. owner has absolute ownership and lifetime and postmortem control of the property. most flexible form of property ownership. owner controls the asset until their death, at death he/she has the right to transfer the property to anyone he or she chooses through the provisions of their will. - entire amount of the asset is included in owner's gross estate - considered probate assets whether they pass through a will or through intestacy - to avoid probate, the owner can transfer the individually owned property into a revocable living trust - if the owner is married, regardless of the provisions of the will, the surviving spouse may be entitled to a minimum share of the decedent's estate based on the state's elective share statutes - liabilities are solely the owner's responsibility, failure to pay off debts could result in creditors either placing a claim (lien) on the property or forcing the owner to sell (levy) the property to meet debt payments

Community Property

form of ownership held by a husband and wife. It is based on the principle that the husband and wife contribute equally to the accumulation of wealth during their marriage. Community property is property and profits received by a husband and wife during their marriage, with the exception of inheritances, specific gifts to one of the spouses, and property and profits clearly traceable to property owned before marriage, all of which is separate property. both husband and wife own a separate, undivided, equal interest in the property. **a significant advantage is that the decedent spouse's share of the property included in the gross estate AS WELL AS the surviving spouse's share of the same property will receive a full step-up in basis at death

Classification Evidence

furnishing records, purchase receipts, deeds of title and records of deposit or withdrawal provides the evidentiary proof needed to classify property as community or separate

Tax Consequences of Individually Owned Assets

it is presumed that the owner has actual and/or constructive receipt of any income generated from the asset and has the power and control over the property to determine who will receive its benefits. Therefore, all of the income produced from the property is taxable to the owner. The owner is responsible for paying taxes when purchasing the property, owning the property, when the property yields any income, and when transferring the property to someone else: - For real property, single owners must pay property taxes and income taxes for any income generated from the property. - For financial assets, the owner is responsible for taxes on any dividends, interest income and capital gains. - Losses from the sale of property can be used as a credit against capital gain.

Tenancy in Common (TIC)

method by which several owners can own property simultaneously. each tenant owns an undivided interest in the property. ownership can either be equal or unequal. one owner cannot speak for the other owners. at death, his or her share is transferred to his or her heirs via will, trust or intestate. the division of income is based on each tenant's respective interest. - there are no survivorship rights - value of an owner's share is included in the owner's gross estate at death - considered probate property - basis in property is calculated based on each contributor's share of the property when acquired

Joint Tenancy with Right of Survivorship (JTWROS)

property is owned by 2+ people. the asset is controlled by all of the owners during lifetime. upon death of one of the owners, the decedent's interest will automatically transfer to the surviving owner. a will does not transfer the interest, the law does. therefore the asset will not pass through probate, but it will still be included in the decedent's gross estate. can be between spouses or non-spouses. - if between SPOUSES = only 1/2 of the value of the assets will be included in the decedent's gross estate. it will also qualify for the martial deduction, those the spouse should face no estate tax liability on the property. - if between NON-SPOUSES = the IRS assumes that the decedent made 100% contribution toward the purchase of the asset so unless the surviving owner can prove that they actually contributed toward the purchase, 100% of the value of the joint owned asset will be included in the decedent owner's estate (fractional interest rule) - only the value of the asset included in the decedent's estate will receive a step-up in basis