2. Forms of Property Ownership

Question 1

Separate ownership/sole ownership/fee simple property

Answer 1

Provides complete lifetime and testamentary control, but also all liabilities, taxes and complicated transfer of ownership after death

Question 2

JTWROS

Answer 2

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

Question 3

When is JT appropriate?

Answer 3

• 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

Question 4

Disadvantages of JT

Answer 4

-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

Question 5

JT Ownership termination

Answer 5

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

Question 6

A mother re-titles the deed to her home as JTWROS with her son. What are the consequences of this action?

Answer 6

-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.

Question 7

Tenancy by the Entirety

Answer 7

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

Question 8

Reverse Gift

Answer 8

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

Question 9

What are similarities between JTWROS property and tenancy by the entirety property?

Answer 9

-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.

Question 10

Tenancy in Common

Answer 10

Several owners who own the property simultaneously, passed by a Will and goes through probate.

Question 11

Differences and similarities between Tenancy in Common and Joint Tenancy

Answer 11

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

Question 12

Advantages of Tenancy in Common

Answer 12

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

Question 13

When Tenancy in Common is Appropriate

Answer 13

• minimize gross estate and estate tax liability
  -reduce income tax liability
  -ensure transfer to designated beneficiary

Question 14

Life Estate

Answer 14

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.

Question 15

Receiving Life Estate

Answer 15

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).

Question 16

Estate for Term of Years

Answer 16

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

Question 17

How to create a life estate

Answer 17

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

Question 18

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?

Answer 18

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.

Question 19

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?

Answer 19

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.

Question 20

Community property

Answer 20

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

Question 21

Classification evidence

Answer 21

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.

Question 22

Estate tax implications

Answer 22

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

Question 23

Separate property is:

Answer 23

-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.

Question 24

A reverse gift transfer will result in a stepped-up basis on transfer at death in each of the following situations

Answer 24

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.

Question 25

Regardless of the provisions within the will, the surviving spouse may be entitled to a minimum share of the decedent’s estate. This right is afforded to a spouse under

Answer 25

Elective share statutes

Question 26

Anton and Phoebe bought an A-frame cabin together as tenants in common. Anton paid 60% of the $300,000 purchase price and Phoebe paid 40%.

When Anton died, he left his share of the property to his daughter, Zella, in his will. The FMV of the property at his death was valued at $600,000.

How much of the A-frame was included in Anton’s gross estate?

Answer 26

The basis in property held as tenancy in common is calculated based on each contributor’s share of the property when acquired.

Anton contributed 60% of the original purchase.

Thus, 60% of the FMV on the date of death was included in Anton’s gross estate.

0.60 x $600,000 = $360,000

Question 27

For non-spousal joint tenants, the joint tenancy status of the property

Answer 27

does not automatically result in the inclusion of only one-half the amount of the joint tenancy property in the decedent’s gross estate.

Question 28

Community property state

Answer 28

Arizona
California
Idaho
Louisiana
Nevada
New Mexico
Texas
Washington
Wisconsin

Opportunities to opt in:
-Alaska
-South Dakota
-Tennessee

Question 29

The recipient of property through a life estate has each of the following rights

Answer 29

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 death interest in the property ends, and
the property will not be included in the gross estate.

Question 30

Each of the following is a type of property that is NOT transferred by will that is subject to probate EXCEPT:

Intestate property
Life insurance policy proceeds or annuities payable to the decedent’s estate
Homestead and exempt property allowances
Tenancy-in-Common property

Answer 30

Tenancy-in-Common property is transferred via a will and is subject to probate.

Question 31

Identify the advantages of titling an asset as tenancy in common.

Control of property transfer
Splitting income from property among owners
Increased property valuation
Non-fractional interests

Answer 31

Tenancy in common can serve as a means of transferring the property to an intended beneficiary under the will. The property does not pass automatically to the surviving tenants in common.

Question 32

For community property interests, decedent’s gross estate would include

Answer 32

One-half of the value of retirement plan assets and IRAs
One-half of the value of a residence
One-half of community property that is titled in one spouse’s name
One-half of the death benefit proceeds of a life insurance policy obtained on the life of one of the spouses would be included in the decedent’s gross estate since the policy and premiums were paid with community property assets.

Question 33

Joao and Nina bought a vacant lot together as tenants in common. Joao paid 20% of the $500,000 purchase price and Nina paid 80%.

When Joao died, he left his share of the lot to his son, Alonso, in his will. The FMV of the property at his death was valued at $800,000.

What is the amount of the basis Alonso inherited for vacant lot?

Answer 33

The basis in property held as tenancy in common is calculated based on each contributor’s share of the property when acquired.

Joao contributed 20% of the original purchase.

Thus, 20% of the FMV on the date of death was included in Joao’s gross estate.

0.20 x $800,000 = $160,000

Alonso will inherit Joao’s stepped-up basis of $160,000.