Characteristics and Consequences of Property Titling

Question 1

What can all property be classified into?

Question 2

What are the different types of titling of property ownership?

Answer 2

• Fee simple
• Community property
• JTWROS
• Tenancy in common
• TOD and POD
• Tenancy by entirety
• Ownership of trusts

Question 3

Remember this picture…

Answer 3

Question 4

Fee Simple Ownership

Answer 4

• Ownership includes all the rights, such as right to buy, sell, transfer, or gift the property during life and death
• This is OUTRIGHT ownership
  *

Question 5

Fee simple - Gross estate, probate, basis

Answer 5

• 100% included in gross estate
• Subject to probate
• If property has designated bene named in a will:
  
  • Passes to bene upon death of sole owner, and bene receives a FULL STEP UP IN BASIS = to FMV of property at death
    
    • This is seen in stocks, bonds, etc.
• Income derived from solely owned assets is taxed to the owner.

Question 6

Community Property

Answer 6

• Currently in Alaska, Arizona, Califronia, Idaho, Lousiana, Nevada, New Mexico, Texas, Washington and Wisconsin
• Both spouses have EQUAL and UNDIVIDED interest in ALL properties, income, earnings, and wealth accumulated DURING MARRIAGE
• Gifts of ownership interest BETWEEN SPOUSES have UNLIMITED transfers without incurring gift tax.

Question 7

Community property - Gross estate, probate, basis

Answer 7

• Community property is divided EQUALLY at death or divorce
• Upon death of spouse, the decedent’s spouse’s HALF of the ownership is INCLUDED in their gross estate.
• Does go through probate
  
  • If property is willed to surviving spouse, new basis in property is the FMV on date of death

Question 8

Community Property - Separate properties

Answer 8

• Each spouse can have separate properties as long as:
  
  • These properties were acquired BEFORE marriage OR
  • Were received as a gift or inheritance by the owner
• These properties that produce income are taxed to owner spouse.
• FMV of separate property is included in the owner’s gross estate and must pass to surviving spouse or others by WILL.
• Separate property that is commingled with community property will be considred community properrty

Question 9

Community property - Life Insurance

Answer 9

• When insured dies in a community property state:
  
  • HALF of the life insurance death benefit is included in insured’s gross estate
    
    • IF life insurance contract is considered SEPARATE PROPERTY AND Premiums are paid through the marriage in community property state:
      
      • Rules of ownership and inclusion of gross estate varies among the community property states

Question 10

Community property - Approval and consent

Answer 10

• One spouse cannot give their share away without approval AND consent from other spouse.
  
  • Unless it is separate property (then they can do whatever they want)

Question 11

Moving from common law state to community property state

Answer 11

• Includes Arizona, Cali, Idaho, Washington, or Wisconsin
• Separate property that they owned in common law state PRIOR to moving to community state is now considerd:
  
  • Quasi-community property
  • SAME RULES AS COMMUNITY PROPERTY NOW
• If community property state DOES NOT HAVE quasi rules yet.. then it remains separate property

Question 12

Moving from community property to common law state

Answer 12

• Property from community state will STILL be considred community proeprty in common law state

Question 13

Community property - what determines character of property?

Answer 13

• The domicle of the couple (even if they bought the property in a non-community state)
  
  • So if they live in community property, it will be considered community property

Question 14

Community property - Type of funds used for purchase determines characterization

Answer 14

• If you buy property from a community property state:
  
  • With separate property:
    
    • Property will be considered separate property
  • If bought with own creditworthiness or non-separate property:
    
    • Property will be considred community property

Question 15

Tenancy in common

Answer 15

• Two or more people hold UNDIVIDED ownership in the property
• Percentage of ownership can vary
• Each owner has the right to sell, gift, transfer or donate their share of ownership just as it was owned outright.
  
  • These rights can be transferred with or without a will

Question 16

TIC - Gross estate, probate, basis

Answer 16

• Upon death of one of the owners, their share in ownership is included in the owner’s gross estate
• There is probate
• No step up in basis for other owners

Question 17

JTWROS

Answer 17

• Joint tenants with rights of surviiorship
• Where two more more people have EQUAL percentage in a property but can have UNEQUAL contributions to acquire that property
• Any incoe received from property is split EQUALLY between tenants
• Tenants own right to dissolve their own portion of ownership in property WITHOUT consent of other owners

Question 18

JTWROS - gross estate, probate, basis

Answer 18

• Upon death of a tenant:
  
  • Property passes AUTO to other remaining tenants, so NO PROBATE
• If held between SPOUSES:
  
  • Half of ownership is included in gross estate (not taxed due to marital exclusion)
  • Surviving spouse inherits decedent’s one-half interest, which has been stepped up to one-half of the property’s FMV
  • Surviving spouse will add decedent’s basis to their orginial basis to property
  • Exception:
    
    • One of spouse is NON US CITIZEN - 100% is included in decendet’s spouse’s gross estate
• If held NONSPOUSES:
  
  • 100% of property is included in decedent’s gross estate
    
    • Unless other spouse contributed to purchase it (then the percentage is included in gross estate)

Question 19

JTWROS - Contribution rule

Answer 19

• Only applies to NONSPOUSES
• Percentage of contribution of the FMV on death will be included in gross estate
• Surviving tenant will add this amount to their orginial basis in property (whatever their contribution was)
• Becomes sole owner and full FMV will be included in thier estate upon death

Question 20

Changing property deed to JTWROS

Answer 20

• A gift of one-half of the property is made to the other joint tenant
• Taxable portion can be reduced by gift tax exclusion because it is a present interest gift

Question 21

JTWROS - Disadvantages

Answer 21

• A creditor of one joint tenant can ATTACH the debtor’s interst in the proeprty
• The property cannot be sold at the joint tenant’s death to pay expenses since the property passes automatically to the surviving joint tenants
• With JTWROS between spouses, if one spouse becomes incompetent, other spouse cannot have access to the incompotent spouse’s interest wihtout a duable power of attorney or guardianship

Question 22

Teanncy by entirety

Answer 22

• ONLY BETWEEN SPOUSES
• CANNOT dissolve their interest in property WITHOUT consent and approval from other spouse

Question 23

Teanncy by entirety - Gross estate, probate, basis

Answer 23

• Upon death of one spouse, one-half of the FMV of property is included in gross estate
• Property is AUTO passed to other spouse (NO PROBATE)
• Surviving spouse gets half of property’s value added to their orginial basis
• Property CANNOT be attached by creditors to satisfy indivdiual debts of a spouse
  
  • However, property may be attached by JOINT CREDITORS

Question 24

POD/TOD accounts

Answer 24

Does not go throught probate

Question 25

What are the parties in trusts?

Answer 25

• Grantor
• Trustee (owns title to property)
• Beneficiaries

Question 26

Trusts - Current and Future interests

Answer 26

• Current interest
  
  • If bene receives income immediately from trust, this is present/current interest
• Future interest
  
  • if bene starts receiving income later from trust
  • Cannot use gift tax exclusion

Question 27

Reversionary interest

Answer 27

• When the GRANTOR in a trust holds the right to regain back the trust property at a future date

Question 28

Remainder interest

Answer 28

• When the future interest in the property, is held by someone other than the grantor

Question 29

Types of remainder interests in trusts

Answer 29

• Contingent remainder interest
  
  • This is conditional on an event happening
  • Such as when the current bene dies, the interest is then transferreed to the other bene
• Vested reaminder interst
  
  • Not conditional on an event happening
  • This is the absolute access to rights and title of the property at a future date

Question 30

What is a life estate?

Answer 30

• A type of partial property ownership
• Can be created in real property so that a life tenant can possess, enjoy, or derive income from the property while alive.
• Can also be created in trust so that the income bene will receive income for life
• Upon death of life tenant, the life estate is transferred to the party with the reaminder interst in the property or the trust
• Life estates DO NOT GO THROUGH PROBATE

Question 31

What happens when a person creates a life estate and a remainder interst for others in property or trust?

Answer 31

• They make a gift of the PV of the life estate to one bene (can use gift tax exclusion) AND
  
  • A gift of the PV of the remainder interest to another (can’t use gift tax exclusion)
• Not inlcuded in gross estate of person who created life estate for others
• NO MARITAL UNLIMITED GIFT TAX DEDUCTION FOR THESE PURPOSES

Question 32

What happens if person creates a life estate for themselves in real property or trust and has a remainder bene?

Answer 32

• Value of trust at death will be included in their gross estate since they are the ones who received the income