OWNERSHIP AND TRANSFER OF ASSETS

Whether you are just beginning to start your estate planning process or reviewing your estate plan, it is critical to know how your assets are currently titled. You can have the ideal will or trusts executed but if your property is not titled to be aligned with your legal documents, your assets may not pass as you intended. We will start with the basics.

Property Interests

All property interests are classified in one of three categories:

1. Real Property – Includes land and anything permanently attached to the land such as buildings, trees, etc. These Items are called fixtures.

2. Tangible Personal Property – all physical property that is not realty, which generally means it is not affixed to the land and is movable.

3. Intangible Personal Property – property that is not real property and is without physical substance such as stocks, bonds, patents, and copyrights. Digital assets are a special form of intangible personal property.

Property Titling Determines Inclusions and Exclusions in Probate Estate and Gross Estate

The probate estate refers to property that transfers at death via the probate process, i.e., by will or state intestacy law. The probate estate excludes property passing by state contract law, i.e., beneficiary designation, or by state titling law, i.e., joint tenancy with right of survivorship (JTROS), and state trust law.

The gross estate is a tax-related term that describes all the property that may be subject to federal estate tax upon death of the decedent. Many clients are misinformed when they think if an asset does not transfer to their heirs via probate, then it is not included in their gross estate. This is incorrect. In some circumstances, it may also include the value of property where the legal title was previously transferred during lifetime, or in the case of a general power of appointment it is the value of property that the decedent had control over but never owned legal title to the property. Usually, the gross estate is much larger than the probate estate. Determination of the amount included in the gross estate for each form of property title is an important consideration when selecting the appropriate method of titling property to meet your goals and tax efficiency.

Common Types of Property Ownership

Here is a description of the more common types of ownership along with the if and how it is included in your gross estate and your probate estate:

Sole Ownership, Fee Simple – is the complete ownership of property by one individual, fee simple part means the owner has all rights associated with the property including the unfettered right to transfer the ownership interest in the property during lifetime (gift or sale) or at death by a will.

Tenancy in Common (TC) – is and interest in property held by two or more related or unrelated people. Each owner is referred to as a tenant in common. TC is the most common type of joint ownership between non-spouses. Each person holds an undivided but not necessarily equal interest in the entire property. Each co-owner does not own a designated portion of the property, instead each owns an interest in the entire property. TC owners typically hold fee simple titling rights.

The property interest is treated as if it were owned outright and each owner’s interest can be used, donated, sold, placed in trust, willed, or transferred by state intestacy laws at the owner’s death unless restricted by agreement. Normally, TC co-owners are not liable for the individual debts of each other. Therefore, a creditor of one co-owner is unable to seize the entire property to satisfy a debt of one individual owner. The creditor is only able to seize or place a lien on the portion of the property that corresponds to the ownership interest of that debtor.

Joint Tenancy with Right of Survivorship (JTWROS) – is an interest in property held by two or more related or unrelated persons called joint tenants. Each owner holds an undivided, equal interest in the whole property. JTWROS co-owners may be liable for the debts of the other co-owners regarding the property held jointly. A creditor of one co-owner may be able to seize the entire property to satisfy a debt of one owner. Each joint tenant shares equally in the income and expenses of the property. The right of survivorship is granted with this form of ownership and at death of the first joint tenant, the decedent’s interest transfers to the other joint tenants directly without going to probate. This transfer process is done according to the state’s titling law.

Tenancy by the Entirety (TE) – this form of ownership is only available to married couples. Neither tenant is able to sever their interest without the consent of the other tenant/spouse. The property ownership interest is automatically transferred to the surviving spouse upon death. It may involve the ownership interest of either real or personal property. TE exists throughout the length of the marriage and terminates upon divorce or death.

Community Property Ownership – this form of joint ownership applies to married couples in nine (9) states: AZ, CA, ID, LA, NV, NM, TX, WA & WI, and the property ownership laws can vary somewhat from state to state. Generally, this form of property ownership is where married individuals own an equal undivided interest in all the property accumulated, utilizing either spouse’s earnings during the marriage.

Life Estate – is an interest in property that provides the owner with the right to the income or the right to use the property, or both, and this right ceases upon death. Upon the death of the life tenant, the property is transferred to the remainder beneficiary who will then own the property. Life estate interests are excluded from the life tenant’s gross estate since they have no disposition powers on the property.