Bryant - Course 6. Estate Planning. 2. Forms of Property Ownership Flashcards
Module Introduction
History bears testimony to the fact that property is not and has never been a natural phenomenon. As a matter of fact, occupancy was the key, according to which the “no man’s goods” of the primitive world were labeled as the private property of individuals. This transition was a landmark in world history. Property was yet another creation of man in the interest of convenience and order. Admittedly, it has its merits, but property, especially in the landed form, must qualify as the biggest cause for strife, since the beginning of civilization.
But today, property or assets must qualify as one of the most important yardsticks for measuring economic success. Property ownership comes in many forms, with each form designed to address a specific need of the property owner.
The Forms of Property Ownership module, which should take approximately four hours to complete, will explain the different types of property ownership in the U. S.
Upon completion of this module you should be able to:
* Describe different types of property ownership.
* Explain the advantages and disadvantages of property ownership forms.
* Explain asset classification.
* Understand management in community property.
* Compare the different kinds of property ownership.
* Identify tax consequences associated with the various property ownership forms.
* Explain the estate planning impact of each form of asset ownership.
Module Overview
Each of these forms of property ownership satisfies specific objectives related to estate planning and non-estate matters.
For example, there are different income, estate, and gift tax implications for all these forms of ownership.
The challenge for the financial planner lies in understanding the impact of property ownership on the successful implementation of the estate plan.
In the data-gathering process, the planner should determine the nature of all property owned by the client, how property titles are held, and the identities of any additional owners or beneficiaries designated in contracts such as life insurance policies, annuities, and retirement plans.
Community property ownership is in use in only nine states in the US. As a result, the rules for community property are state-specific and, therefore, may significantly impact the estate plan depending on the location of the client’s home.
To ensure that you have an understanding of forms of property ownership, the following lessons will be covered in this module:
* Individual or Separate Ownership
* Joint Tenancy with Right to Survivorship
* Tenancy by the Entirety
* Tenancy in Common
* Life Estate
* Community Property
Exam Tip: For each property ownership title, be able to identify the following characteristics:
* The number and type(s) of owners
* Whether the owner(s) can transfer property
* Presence of survivorship rights
* Inclusion in the probate estate
* Inclusion in the gross estate
Sections
- Individual or Separate Ownership
- Joint Tenancy with Right to Survivorship
- Tenancy by the Entirety
- Tenancy in Common
- Life Estate
- Community Property
Exam Tip: For each property ownership title, be able to identify the following characteristics:
* The number and type(s) of owners
* Whether the owner(s) can transfer property
* Presence of survivorship rights
* Inclusion in the probate estate
* Inclusion in the gross estate
Section 1 - Individual or Separate Ownership
Describe characteristics of Individual or Separate Ownership
The primary characteristic of property held in sole ownership, also known as fee simple property or separately owned property, is that the owner has absolute ownership and control of the property. This means that if the owner wishes to sell it or make a lifetime gift of the property to someone else, the owner has an absolute, unqualified right to do so.
As the sole owner of the property, the owner controls the asset until the date of death. The sole owner has the right to transfer the property to anyone he or she chooses through the provisions of the owner’s will.
As a result, individually owned assets transferred under the provisions of a will are probate assets.
If the owner does not have a will, the laws of intestacy in the state of the decedent’s residence will determine to whom the separately owned assets will transfer. These assets are still probate assets.
To avoid probate after death, the owner may transfer the individually owned property into a revocable living trust.
Both lifetime control and postmortem control of property are characteristics of property held in sole ownership. As a result, the property owner has the right to control this asset fully.
Separate IRA Ownership Example:
As their name suggests, IRAs (Individual Retirement Accounts) are a type of single-owner account. Therefore, all investment decisions for the assets held in an IRA require the owner’s approval. Neither spouses nor beneficiaries should be able to make decisions on the account unless legally given the power to do so.
What percentage of separately-owned assets value on the date of death will be included in the owner’s gross estate after death?
* 100%
* 10%
* 50%
* 80%
100%
- 100% of the assets value on the date of death will be included in the owner’s gross estate after death.
What are the disadvantages of being a single owner?
Liabilities
The downside of being a single owner of a property is that the liabilities are solely your responsibility. For example, if someone slips and falls on your property, you are responsible for any resulting liability. Adequate property insurance planning may be able to prevent unforeseen liabilities.
Liabilities from creditors are the responsibility of the single owner as well. Owners must make debt payments on the property, such as mortgage payments. Failure to pay off debts could result in creditors placing a claim (lien) on the property or forcing the owner to sell (levy) the property to meet debt payments.
Financial assets held as single ownership are exposed to any of the owners’ liabilities.
Describe Tax Consequences of Individual or Separate Ownership
With individually owned property, 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 an 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 a property can be used as a credit against capital gain.
If the owner of an individually owned property chooses to gift the income to a non-owner, and even if income is generated before making the gift, the asset’s owner will be subject to potential gift tax liability on the amount of the transfer.
* If the amount in question exceeds the annual exclusion amount, the owner will have to use his or her applicable credit (i.e., $5,311,800 in 2023) amount to absorb the gift tax liability on the amount of the taxable gift.
The entire amount of the individually owned property will be included in the owner’s gross estate for estate tax purposes. Unless some special valuation technique is used, such as alternate valuation or special use valuation, the includible value of the individually, or separately-owned property will be its fair market value as of the date of the owner’s death.
Describe how Property Transfers at Death with Individual or Separate Ownership
- If the individual owner of the asset is married, 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 the state’s “elective share” statutes.
- These statutes are specific to the decedent’s state of residence. Therefore, the percentage of the decedent’s estate to which a surviving spouse may be entitled may vary by state.
- In any event, to the extent the decedent does not leave the state’s minimum to the surviving spouse, he or she may “elect” against the will in order to receive his or her legally required share of the assets.
- A valid pre-nuptial agreement will supersede state statutes such as the elective share statute, therefore the surviving spouse would not be permitted to “elect” against the will.
Therefore, if the sole owner wants to guarantee the transfer of the property to a specific individual other than the surviving spouse, depending on state law, proper planning may suggest that the sole owner convert the property into joint tenancy with the right of survivorship with the specific individual at some point in the sole owner’s lifetime.
* Otherwise, an individual who has left the solely owned property under the terms of the will could unexpectedly have the property taken by the surviving spouse, since many elective share statutes disrupt the testamentary plans of the owner of the solely held property.
* However, the elective share statutes may encompass all of the decedent’s assets so the planner has to be familiar with state law before any title changes occur.
If the individual owner dies without a will, the individual property will pass to the decedent’s heirs, according to the laws of intestate succession, also known as the laws of intestacy.
* Each state has its own laws of intestacy. These statutes determine to whom the decedent’s property will pass and the amount.
Should the decedent die without a will and without living heirs or designated beneficiaries, the property will escheat to the state. This effectively means that the state of the decedent’s residence becomes the heir to all of the decedent’s assets. Therefore, if the individual owner of property wants control over the ultimate heirs of the separately owned assets, a will should be executed.
Certain types of separately owned assets can automatically transfer to an heir upon the owner’s death. These assets include beneficiary designation assets such as life insurance, retirement plans, and securities (only in those states with payable on death or POD statutes).
* Generally, these types of assets, although separately owned, do not transfer under the provisions of a will.
As administrative expenses and attorney’s fees are frequently calculated as a specific percentage of the decedent’s probate estate, the fact that the decedent was the individual owner of a sizeable amount of property may cause these expenses to be greater than they would be if the property were held in some form of joint tenancy or, as a beneficiary designation asset, or as a separately-owned asset within a revocable trust. Therefore, if the owner of individually owned property wants to ensure that these expenses are reduced, it may be suggested that the property not be owned as an individually- or separately-owned asset.
Practitioner Advice:
* It is essential to differentiate between probate expenses and estate taxes.
* Separate property and property titled as Tenancy in Common are transferred to others by Will. Consequently, the property is subject to probate expenses and estate taxes.
* Other forms of property ownership, such as Joint Tenancy With Right of Survivorship (JTWROS) and Tenancy by the Entirety (TE) avoid probate because they pass automatically to others by the operation of law.
* However, they are subject to estate taxes in the property owner’s estate.
Which types of property ownership are probate substitutes?
Administrative expenses and attorney’s fees are commonly calculated as a specific percentage of the decedent’s probate estate. The fact that the decedent is the sole owner of a sizeable amount of property may cause these expenses to be greater than they would be if the property were held in some form of joint tenancy or as a beneficiary designation asset, or as a separate asset within a revocable trust.
Therefore, if minimizing the time and expense associated with probate is a planning objective, property should be owned in a manner which affords a probate substitute.
For example, assets jointly owned with rights of survivorship, assets transferring under a beneficiary designation, and assets owned within a trust prior to death, are probate substitutes.
However, proper estate planning may also mean reducing estate taxes. Not all probate substitute assets will afford your client this result. Do not let the probate tail wag the tax dog.
Each of the following are a type of property ownership that avoids probate EXCEPT:
* Individually-owned car, titled to the decedent.
* Jointly-owned assets with rights of survivorship.
* Assets transferring under a beneficiary designation.
* Assets owned within a trust prior to death.
Individually-owned car, titled to the decedent.
- All of these except an individually-owned car, titled to the decedent will avoid probate.
What are the Advantages of Individually Owned Assets?
Assets that are individually or separately owned provide advantages that no other form of ownership provides.
Advantages of Individually Owned Assets:
* The simplest form of property ownership.
* Provides the owner with absolute control over the property. The owner can sell, gift, convey, or pledge the property without the consent of other individuals.
* The asset owner can reap any financial benefits associated with the property (i.e., rental income).
* The individually-owned asset is generally only attachable by the creditors of the owner of the asset.
* Allows the client and the planner to create an estate plan that can minimize tax liability.
Section 1 - Individual or Separate Ownership Summary
Property owned as a single owner gives the owner complete control over the property. Single owners do not need to share decision-making with others on the property’s purchase, sale, or transfer. This freedom comes with the price of having to bear all burdens of liabilities, being responsible for taxes, and dealing with the complicated process of ownership transfer upon death.
In this lesson, we have covered the following:
* Separate Ownership: Single owner has complete lifetime and testamentary control over the property.
* Liabilities: Single owner bears all liabilities of the property. These liabilities include debts, expenses, taxes, etc. Failure to make payments can result in debtors forcing owners to sell the property to pay debts.
- Tax Consequences: Single owners are responsible for paying all the taxes associated with the property. Real property may have excise taxes, while financial assets may have income or capital gains taxes associated with various transactions. A gift of the income or the property itself from an owner to a non-owner would result in a potential gift tax liability on the transfer amount.
- Property Transfer at Death: Individually owned assets must pass to heirs by a Will or through intestacy. This property is subject to probate.
- Probate Property: The costs associated with probate range from 1-6% of the property’s value. Probate can be avoided by jointly held property, beneficiary designations in contracts and pensions, and property placed into revocable or irrevocable trusts.
- Advantages of individually owned assets: There are several advantages to this form of property ownership, such as ease of ownership, the owner controls property, the owner reaps financial gains, minimizes owner’s estate tax by using the unified credit amount to offset estate tax liability, and limits creditor liability to the owner, not others.
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? (Select all that apply)
* Cecilia should be worried about her ex-husband gaining access to her account
* The bank should not perform any transactions without Cecilia’s approval
* Someone whom she granted permission to through power of attorney can make transactions from her account
* Cecilia’s ex-husband has equal ownership to her account
The bank should not perform any transactions without Cecilia’s approval
Someone whom she granted permission to through power of attorney can make transactions from her account
- 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.
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? (Select all that apply)
* Force her to liquidate the home to pay off the debt
* Nothing to her property
* Place a claim on her home
Force her to liquidate the home to pay off the debt
Place a claim on her home
- 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.
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?
* Investment Planning
* Insurance Planning
* Retirement Planning
* Tax Planning
* Estate Planning
Estate Planning
* 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.
Section 2 - Joint Tenancy with Right of Survivorship
Describe Joint Tenancy with Right of Survivorship when owners are married
Joint tenancy with rights of survivorship (JTWROS) is a type of property ownership involving two or more people.
* All of the owners control an asset that is jointly owned with rights of survivorship during their lifetime.
* Upon the death of one of the owners, the decedent’s interest in the jointly owned property will automatically transfer to the surviving owner.
* Therefore, when an asset is jointly owned with rights of survivorship, a will does not transfer the decedent’s interest in the property, the law does.
Spouses or non-spouses may own property that is titled JTWROS. Regardless of whom the joint owners are, the decedent’s interest will automatically transfer to the surviving owner.
From an estate tax perspective, whether or not the property owners are spouses will have a tremendous impact on the calculation of the estate tax liability. Specifically, under Internal Revenue Code Section 2040(b)(1), only one-half the value of assets jointly owned rights of survivorship between spouses will be included in the decedent’s gross estate.
This property will also qualify for unlimited marital deduction because it passes to the surviving spouse (as long as the surviving spouse is a U.S. citizen).
* As a result, the first spouse’s estate should face no estate tax liability on such property, even though one-half the value of the jointly held property is included in the decedent’s gross estate.
* The surviving spouse’s gross estate will include the entire property value. However, unless the surviving spouse remarries, his or her estate will not benefit from the unlimited marital deduction. As a result, an estate tax may be due.
- When an individually-owned asset is changed to a right of survivorship asset and the 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.
- If the property is real estate, the contribution rule applies to gift tax purposes.
Describe Joint Tenancy with Right of Survivorship with non-married joint owners
The rule is different for non-married joint owners.
* Upon the first owner’s death, the IRS assumes that the decedent made a 100% contribution toward the asset’s purchase.
* Unless the surviving owner can prove an 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.
* 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.
Example (Fractional Intrest Rule)
An asset worth $100,000 is acquired by A and B, who are not married, and title the property JTWROS. A pays $25,000 toward the property, or 25%, and B pays $75,000 for the property or 75%. Upon A’s death 10 years later, the property’s value is $1 million.
* Since A and B are non-spouse joint property owners, how much will be included in A’s gross estate?
* However, since B can prove that he contributed 75% toward the purchase of the property, only __ ____??____ __ will be included in A’s estate.
An asset worth $100,000 is acquired by A and B, who are not married, and title the property JTWROS. A pays $25,000 toward the property, or 25%, and B pays $75,000 for the property or 75%. Upon A’s death 10 years later, the property’s value is $1 million.
* Since A and B are non-spouse joint property owners, $1 million will be included in A’s gross estate.
* However, since B can prove that he contributed 75% toward the purchase of the property, only 25% of the $1 million asset, or $250,000, will be included in A’s estate.
Describe 3 Main Characteristics of JTWROS
The primary characteristics of property held jointly with rights of survivorship are as follows:
* Several owners share property. While the typical case has two owners, the property held jointly may have three or more owners.
* This creates a situation where the lifetime control of the property is divided among all of the owners. In other words, the control, ownership, and enjoyment of the property are shared equally by all of the joint tenants.
For example, any income from income-producing property that is titled JTWROS will be split equally among all of the joint tenants. 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.
Survivorship feature. Upon the first owner’s death, the property immediately passes to the surviving owner(s), in equal shares. Thus, if there is only one surviving owner, the surviving owner becomes the owner of the entire interest of the asset. As a result, the first owner cannot control who will receive his or her interest in the property. The automatic survivorship feature of JTWROS means that the decedent’s interest in the property is not governed by the terms of his or her will. Instead, such property passes automatically to the surviving owner(s) regardless of the terms of the will.
Exclusion from the probate estate. The survivorship feature of JTWROS property causes the property to be excluded from the decedent’s probate estate. Thus, if an individual wants to transfer the property outside of probate, the asset should be owned JTWROS. However, keep in mind that by minimizing the probate expenses, we may not be given an opportunity to minimize estate tax.
Describe Basis in JTWROS
Regardless of whether the property is jointly owned between spouses or non-spouses, only the value of the asset included in the decedent’s estate will receive a step-up in basis.
Basis is determined by fair market values (FMV) at the date of the property owner’s death.
Calculation of the step-up amount, however, differs between spousal JTWROS property and JTWROS property owned by non-spouses.
Example (Basis Calculation: Spousal JTWROS Property)
A husband and wife bought a country home together for $80,000 and titled the property JTWROS. The husband paid 80% or $64,000, and the wife paid 20% or $16,000. Although each paid different amounts, the spousal property is treated as equally owned.
* As a result, both husband and wife have an original basis of __ ____??____ __.
When the husband died in the current year, the country home was valued at $200,000. The husband’s gross estate included 50% of $200,000 or $100,000.
The wife received his husband’s spousal JTWROS share of the property and now has sole ownership of 100% of the property.
* The wife’s new basis is __ ____??____ __.
A husband and wife bought a country home together for $80,000 and titled the property JTWROS. The husband paid 80% or $64,000, and the wife paid 20% or $16,000. Although each paid different amounts, the spousal property is treated as equally owned.
* As a result, both husband and wife have an original basis of $40,000 ($80,000 (original purchase) x 0.50)).
When the husband died in the current year, the country home was valued at $200,000. The husband’s gross estate included 50% of $200,000 or $100,000.
The wife received his husband’s spousal JTWROS share of the property and now has sole ownership of 100% of the property.
* The wife’s new basis is $140,000, based on her original basis of $40,000 plus her husband’s share of property that was stepped-up in basis to $100,000.
Wife’s Original Basis $40,000 Husband’s Step-Up Basis $100,000
Wife’s New Basis $140,000
Example (Basis Calculation: Non-spousal JTWROS Property)
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.
* Here, each party’s original basis is calculated based on the percentage of their contribution (80% for the father, 20% for the son).
* When the father died in 2020 the lot was valued at $200,000. The father’s gross estate included __ ____??____ __.
The son received his father’s non-spousal JTWROS share of the property and now has sole ownership of 100% of the property.
* The son’s new basis is __ ____??____ __.
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.
* Here, each party’s original basis is calculated based on the percentage of their contribution (80% for the father, 20% for the son).
* When the father died in 2020 the lot was valued at $200,000. The father’s gross estate included 80% of $200,000 or $160,000.
The son received his father’s non-spousal JTWROS 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.
Son’s Original Basis $16,000
Father’s Step-Up Basis $160,000
Son’s New Basis $176,000
Describe Avoiding Adverse Tax Consequences in JTROWS
As previously noted, the estate tax implications of holding property jointly with right of survivorship are complicated.
In order to prove contribution toward the purchase of the property, accurate records must be kept by all of the tenants, including the amount of their original contribution and the cost of any additional improvements born by each of the tenants.
Since it is not possible to know who will die first, it is prudent for all of the joint owners to keep these records in order to protect the interests of all tenants.
Joint tenants such as parent and child, partner and partner, or non-spousal joint tenants need to remember that the joint tenancy status of the property does not automatically result in the inclusion of only one-half the amount of the joint tenancy property in the decedent’s gross estate.
According to IRC Section 2040(a), except for joint tenants who are married, 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?
* 100%
* 50%
* 20%
* 80%
100%
- Unless the surviving owner can prove contribution toward the purchase of the asset, 100% of jointly held property will be included in the gross estate if the first owners die.
When is Joint Tenancy Appropriate?
Although there are no hard and fast rules regarding the appropriateness of titling, the following circumstances indicate that holding property jointly with rights of survivorship may be a good selection:
* To ensure that the property automatically passes to a specific individual upon the owner’s death. If the property is held jointly with rights of survivorship, the title passes to the surviving owner immediately upon the first owner’s death.
* To avoid probate. Joint tenancy property bypasses the probate process. This means title vests immediately in the survivor. There are no time delays, administrative costs or legal fees associated with the property transfer to the surviving joint tenant.
* To reduce administrative costs and attorney’s fees. The use of joint tenancy can be effective since these fees are often calculated as a percentage of the probate estate.
* To minimize income tax liability. This can be achieved by splitting the income with other joint tenants, with resultant tax savings for each joint tenant, instead of having all of the income reported by a sole owner.
What are the disadvantages of jointly-held property?
- Creditors can reach a joint tenant’s undivided interest.
- A spouse’s unified credit can only be used to offset estate taxes for the solely owned property, not for assets titled JTWROS.
- If one joint tenant becomes incapacitated, his share of joint property is not accessible to the other joint tenant unless the other joint tenant has a durable power of attorney or is appointed guardian or conservator by the probate court.
- Exceptions are joint bank accounts and securities held in street name.
- A decedent joint tenant’s estate may have a liquidity problem since the JT property passed directly to the other joint tenant and is not available to the decedent’s estate to pay for taxes, debts, or expenses.
Describe Ownership Termination in JTWROS
It is easy to terminate a property interest that is owned as JTWROS. The joint tenancy may be terminated unilaterally by any one of the joint tenants. This causes a severance of the characteristics of joint tenancy property, such as an undivided interest in the entire property.
Owners of assets that are jointly owned with rights of survivorship acquire the same interest in the same property at the same time and normally take possession simultaneously.
The severance of a joint tenancy does not require the consent of all of the joint tenants.
* For example, joint tenancy property can be converted to tenancy in common by one joint tenant, without the consent of other joint tenants, to terminate the interest.
* However, as a practical matter, it is always prudent to obtain the signature of the non-consenting joint tenant(s), on, for example, a deed transfer form, especially if the joint tenants are spouses. This could prevent the non-consenting joint tenant from asserting survivorship rights in the property sold to a third party. The only way to nullify these rights is by obtaining the consent of all of the joint owners of the asset.
A person’s creditors may force a sale of property held in joint tenancy to satisfy an unpaid judgment. The consent of the remaining joint tenants is not necessary to sever the joint tenancy in this manner. Upon the death of a joint tenant, creditors may not lay claims to the portion of the property that has been passed on to the other joint tenants through rights of survivorship.
Practitioner Advice:
Joint tenancy can present problems.
* Sometimes, a co-owner can dispose of the property without the financial planner’s knowledge or consent.
* Consequently, consent of the co-owner may be needed before entering a transaction.
* This can only make problems worse in troubled marriages or between divorced partners.
* Furthermore, joint tenancy makes one’s interest in the property liable for claims on the co-owner.
* When one of the owners is engaged in a business with potential liabilities, joint tenancy should be avoided.
Section Summary
Property titled as JTWROS can be owned between spouses and non-spouses, with each JT owning equal interests in the income (if any) and the property.
In this lesson, we have covered the following:
JTWROS: With property held as JTWROS between spouses ½ of the FMV of the property is included in the decedent JT’s estate. This ½ gets a marital deduction. Property held as JTWROS with non-spouses is subject to the fractional interest rule in the decedent JT’s estate, based on their contribution to the original purchase price. This property is not subject to an estate tax but it will be included in the decedent’s estate.
Primary Characteristics: JTWROS property passes automatically by operation of law to the surviving JT. No will is needed to pass property to others, therefore, property titled JTWROS avoids probate.
When JTWROS is Appropriate: Advantages of property titled as JTWROS include ownership transfer occurring immediately at death, avoidance of probate, avoidance of transfer fees, and splitting of income for income tax purposes.
Ownership Termination: JTWROS property can be terminated by one JT to form a Tenancy in Common without the consent of the other JT.
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? (Select all that apply)
* Tom’s Estate
* Jennifer
* Michelle
* Heather
Jennifer
Michelle
Heather
- 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.
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?
* $30,000
* $60,000
* $80,000
* $90,000
$90,000
- $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.
Descibe the Stepped-up Basis in Tenancy by the Entirety
Stepped-up Basis
Property that spouses own as JTWROS or as Tenancy by the Entirety will receive a stepped-up basis in the decedent’s ½ of the property that is included in the gross estate.
The surviving spouse will acquire the decedent’s new stepped-up basis, but they will not receive a step-up in basis for their ½ share of the property they own.
Example (Stepped-up Basis)
A husband and wife bought a home for $200,000. The husband paid 75% or $150,000, and the wife paid 25% or $50,000. When the husband died in the current year, the home was valued at $400,000, and ½ of the property, or $200,000 was included in his gross estate.
* His wife received his stepped-up basis of $__ ____??____ __ which is added to her original basis in the property.
* Although she only paid 25% when they acquired the property, each spouse is considered to own an equal ½ share. Therefore, her original basis at acquisition was $__ ____??____ __ and her new basis in the property is $__ ____??____ __.
A husband and wife bought a home for $200,000. The husband paid 75% or $150,000, and the wife paid 25% or $50,000. When the husband died in the current year, the home was valued at $400,000, and ½ of the property, or $200,000 was included in his gross estate.
* His wife received his stepped-up basis of $200,000 which is added to her original basis in the property.
* Although she only paid 25% when they acquired the property, each spouse is considered to own an equal ½ share. Therefore, her original basis at acquisition was $100,000 and her new basis in the property is $300,000.
A mother re-titles the deed to her home as JTWROS with her son. What are the consequences of this action? (Select all that apply)
* 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, but she can use her unified credit amount to offset up to $5,311,800 in value, in 2023.
* If the mother becomes incompetent, her son can sell the home to pay for her medical care.
* If the mother is sued, her creditors cannot reach her son’s JT interest.
* When the mother dies, her executor cannot sell the house to pay her estate taxes but a unified credit of $5,311,800 is available to offset up to $12,920,000 in estate taxes.
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, but she can use her unified credit amount to offset up to $5,311,800 in value, in 2023.
When the mother dies, her executor cannot sell the house to pay her estate taxes but a unified credit of $5,311,800 is available to offset up to $12,920,000 in estate taxes.
* 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.
Community Property Separately Owned
Money earned by either spouse, post-marriage Property acquired by either spouse prior to marriage
Property purchased by either spouse, post-marriage Gifts to an individual spouse while married.
Commingled separately owned assets and community property assets Inherited assets bequeathed to either spouse, individually, while married.
Section 3 - Tenancy By the Entirety
Describe Tenancy By the Entirety
Tenancy By the Entirety
A tenancy by the entirety is a specialized form of joint tenancy with right of survivorship existing between co-tenants who are spouses.
* The estate is based on the common law concept of “spousal unity” - that the two spouses are one person.
* Common law, therefore, dictates that a transfer of property to the spouses results in only one estate, an entirety. In this estate, the spouses own the whole interest collectively, but no undivided individual share.
* With the modern erosion of the concept that spouses are one, most states have abolished tenancy by the entirety.
* In states that still retain this form, spouses usually possess equal rights in controlling and enjoying the property.
The survivorship feature that is characteristic of joint tenancy property is also found in tenancy by the entirety.
* Upon the first spouse’s death, the property automatically passes to the surviving spouse without a will and outside of the probate process.
Describe Reverse Gift
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.
* In that case, the basis in the gifted property will not be stepped up to its date of death value and the donor will retain their original adjusted basis in the property.
* This amount could include the original basis plus any gift taxes the donor paid on the transfer.
* The property is includible in the donee’s gross estate and the donor’s gross estate at the date of death FMV.
This transfer will work if 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.
* In these two situations, the transferred property would receive a stepped-up basis in the decedent spouse’s estate for the property’s fair market value.
Describe Characteristics of Tenancy By the Entirety
Characteristics of Tenancy By the Entirety
Property held in tenancy by the entirety differs from joint tenancy property in two significant aspects:
* Only husband and wife may hold the-idered a disadvantage, especially if one of the spouses needed to sell his or her one-half interest to generate revenue or cash for various reasons.
* Property held in tenancy by the entirety can only be severed with both spouses’ consent or by divorce.
One spouse, acting alone, cannot sever the ownership form and transfer his or her share to a third party. Such an attempt could be challenged as a fraudulent conveyance in violation of the other spouse’s survivorship rights.
For example, Alex and Jenny hold property in a tenancy by the entirety. Alex makes a deed that purports to transfer his interest in the property to John. Jenny does not join in this deed. After that, Alex dies. Jenny now has full title to the property, while John has nothing.
Presumably, this protection could make the property’s value higher than it would be if either joint tenant could unilaterally sever the joint tenancy and transfer the property to a third party.
At the same time, this inability to sever the property without the other spouse’s consent could be considered a disadvantage, especially if one of the spouses needed to sell his or her one-half interest to generate revenue or cash for various reasons.
Tenancy by the entirety offers limited protection from creditors as well.
* If one spouse defaults on debts and creditors are seeking compensation, the most the creditor can do is put a lien (claim of property if it is sold or until debt is paid off) on the property.
* This protection is not afforded with property titled JTWROS.
* However, creditors can satisfy judgments for debts that are attributed to both spouses.
Practitioner Advice:
An alternative available to protect property for married owners from creditors is the Homestead Act.
Some states adopted this law to encourage the development of abandoned real estate.
Others have adopted it as property tax relief or special tax considerations.
For example, if a married couple over age 62 registers their home for homestead exemption in Massachusetts, they can protect up to $500,000 each of home equity from certain creditors.
Each time the owners refinance or take out a home equity loan, they must re-file the property for the homestead exemption.
A client can check with a real estate broker or attorney to see if the homestead exemption is available in his or her state.
John Nash and his wife Susan Nash are joint owners of a property. Susan can terminate the ownership without John’s permission.
* False
* True
True
- 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.
Example (Reverse Gift)
Chris gifts stock worth $80,000 to his dying wife Elaine, which has a basis of $20,000.
* If Elaine dies 10 months later, the stock will not get a step-up in basis, unless __ ____??____ __.
* If Elaine dies 14 months later, the stock bequeathed to Chris would receive a step-up in basis to FMV at Elaine’s death.
Chris gifts stock worth $80,000 to his dying wife Elaine, which has a basis of $20,000.
* If Elaine dies 10 months later, the stock will not get a step-up in basis, unless she bequeaths the stock to someone other than Chris.
* If Elaine dies 14 months later, the stock bequeathed to Chris would receive a step-up in basis to FMV at Elaine’s death.
Section Three Summary
In this lesson, we have covered the following:
* Tenancy by the entirety: A form of property ownership similar to JTWROS but only owned between husband and wife.
* Characteristics of tenancy by the entirety: Property interests cannot be severed by one spouse. Limited creditor protection is provided for claims against one spouse, but property may be attached by joint creditors.
- Stepped-up basis: The decedent spouse includes ½ of the FMV of the property in their gross estate at death. This amount is subject to the marital deduction and receives a full step-up in basis.
- Reverse gift: A technique to transfer an asset with a low basis to a dying spouse to receive a full step-up in basis. The technique will not work if the dying spouse dies within one year of the transfer.
