2. Forms of Property Ownership Flashcards
Separate ownership/sole ownership/fee simple property
Provides complete lifetime and testamentary control, but also all liabilities, taxes and complicated transfer of ownership after death
JTWROS
2+ jointly owned with decedent’s interest automatically transferring to surviving owner by law.
If married, then spousal property is treated as equally owned and only half of assets in JTWROS is included in decedent’s gross estate and qualifies for unlimited marital deduction (as long as surviving spouse is US citizen)/there would not be estate tax liability. Surviving spouse’s gross estate will include entire property value and an estate tax may be due.
If not married, then under the fractional interest rule, unless surviving owner can prove otherwise, IRS assumes that decedent contributed 100% and value of the assets will be included in decedent owner’s estate. This applies to step-up in cost basis and affects estate taxes
If individual is converted to JTWROS and new owner is not a spouse, then a withdrawal constitutes a gift.
Although this minimizes probate expenses, not estate tax
When is JT appropriate?
- Ensure automatic transfer upon first owner’s death
- Avoid probate
- Reduce admin costs
-Minimize income tax liability by splitting income with tenants
Avoid if owners are engaged in business with potential liabilities
Disadvantages of JT
-Creditors can reach JT’s undivided interest
-Spouse’s unified credit can only be used to offset estate taxes for solely owned, not for assets under JTWROS
-If one JT becomes incapacitated, the share is not accessible by the other JT unless ze has a DPOA/is appointed guardian/conservator by probate court (exception joint bank accounts and securities held in street name)
-decedent’s estate may have liquidity problem if property passed and not available to pay for taxes, debts or expenses
JT Ownership termination
Can be terminated unilaterally and can be converted to tenancy in common without consent of other joint tenants; however for deed transfer form if JT are spouses, should obtain signature to prevent non-consenting spouse from asserting survivorship rights
Creditors may force sale of property to satisfy unpaid judgement
A mother re-titles the deed to her home as JTWROS with her son. What are the consequences of this action?
-The mother made a gift of ½ of her home to her son.
-When the mother dies, 100% of the FMV of the home will be included in her estate, her executor cannot sell the house to pay her estate taxes; but she can use her unified credit amount to offset up to $5,311,800 in value, in 2023.
Tenancy by the Entirety
Based on common law concept of spousal unity, can only be held by spouses and can only be severed with both spouses’ consent or divorce.
If one spouse defaults on debts, creditor can only place lien (claim of property if sold or until debt is paid)- unless in a state with Homestead Act protection
Reverse Gift
A person who gifts highly appreciated property to spouse who is dying can receive the property back with step-up in basis upon death if >1year, or if decedent gifts to someone other than original donor/spouse
What are similarities between JTWROS property and tenancy by the entirety property?
-Property passes by operation of law.
-Property avoids ancillary probate if located out of state..
-Property may be attached by joint creditors.
-Property title is considered a will substitute.
Tenancy in Common
Several owners who own the property simultaneously, passed by a Will and goes through probate.
Differences and similarities between Tenancy in Common and Joint Tenancy
Can own equal/fractional shares, free to transfer respective shares to o/, consent is not necessary when transferring title.
If unrelated and positions where interests are potentially adverse, making a sale potentially difficult, valuation may be discounted/co–ownership discount. Basis is based on contributor’s share of property.
Creditors can only attach share of common property owned, and decedent’s applicable credit can be used to offset value included in gross estate since marital deduction would only apply if bequeathed to surviving spouse in will
Advantages of Tenancy in Common
Can split income, reduce value for estate tax purposes, transfer without consent and can transfer to beneficiary under will, effective estate tax planning for spouses
When Tenancy in Common is Appropriate
- minimize gross estate and estate tax liability
-reduce income tax liability
-ensure transfer to designated beneficiary
Life Estate
Allows a life tenant to immediately possess and derive income from property for the rest of zirs life, responsible for property taxes and maintenance.
Remainder beneficiary receives possession of property at life tenant’s death. Will substitute since transferred by deed, and avoids probate if included in life tenant’s estate.
If property is sold before tenant’s death, then portion of gain is taxed to both. Life tenant’s gain qualifies for $250K cap gains exclusion, but not remainderman’s. If not sold. remainder beneficiary will receive step-up.
Receiving Life Estate
Has control and use of property, but can’t choose beneficiary, value would not be included in estate.
Property owner is subject to gift taxes for PV of property interest. Value determined by actuarial tables. Can take annual exclusion to reduce gift tax. Value of gift to beneficiary is based on PV of beneficiary’s remainder interest (gift of future interest)- cannot take annual exclusion.
If spouse given life estate in property, can’t use marital deduction (aside from Q-TIP election) by the donor/decedent’s executor to offset gift/tax liability. Considered terminable interest property and not part of spouse’s estate (unless Q-TIP is filed or has POA in will/trust).
Estate for Term of Years
If death occurs before expiration of term, then a will can appoint another tenant to use the income or receive the income; if no will, then remainder of term interest passes through intestacy
Donor can take annual exclusion to offset gift, but not marital deduction since spouse is not given interest in property for life, just number of years.
Remainder beneficiaries may have vested (fixed and absolute)/contingent remainder interest
How to create a life estate
Sole owner can gift to self and gift remainder interest to someone else, or can create a trust that provides income for life by changing deed. Included as part of gross estate. Remainder interest gift will not be adjustable taxable gift in estate tax calculation
Tom’s will gave his wife Mary a life estate in his Italian villa at his death in the current year. His executor did not elect to use the Q-TIP election. What are the estate tax consequences for Tom’s estate?
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. Tom can use his applicable credit amount to reduce any estate tax liability. If the executor had made a Q-TIP election, the marital deduction would have been available to Tom’s estate.
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?
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.
Community property
In 9 states, different from other common-law forms of property ownership: any property acquired during course of marriage should be divided equally, may have separately owned interest
Classification evidence
Furnishing Records: establish that purchaser provided all consideration for property.
Purchase Receipts: Property purchased with separately-owned assets of one of the spouses.
Deeds of Title: Property titled in sole ownership or joint tenancy with right of survivorship.
Records of Deposit: Property acquired with funds acquired from one of the spouses through gift or inheritance.
Estate tax implications
decedent’s gross estate would be one half of assets, and spouse/beneficiary in will would receive step-up in basis
(If titled JTWROS/Tenancy in Common, only decedent’s one half interest is stepped up
Separate property is:
-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.
-property acquired by either or both of the spouses themselves is deemed to be community property, unless titled otherwise.
A reverse gift transfer will result in a stepped-up basis on transfer at death in each of the following situations
the decedent lives for more than one year after receiving the gift, or
if the gifted property is bequeathed to anyone other than the original donor or the donor’s spouse.
