Forms of Property Ownership Flashcards
Types of Property Ownership in the U.S.
There are different forms of property ownership in the US. These include individual or separately owned property, joint tenancy with right of survivorship, tenancy by the entirety, tenancy in common, and life estates. Each of these forms can be identified by certain characteristics that are typical to the form.
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?
A. Cecilia should be worried about her ex-husband gaining access to her account
B. The bank should not perform any transactions without Cecilia’s approval
C. Someone whom she granted permission to through power of attorney can make transactions from her account
D. Cecilia’s ex-husband has equal ownership to her account
Correct Answer: B. and C.
Explanation: 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?
A. Force her to liquidate the home to pay off the debt
B. Nothing to her property
C. Place a claim on her home
Correct Answers: A. and C.
Explanation: 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?
A. Investment Planning
B. Insurance Planning
C. Retirement Planning
D. Tax Planning
E. Estate Planning
Correct Answers: E. Estate Planning
Explanation: 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.
Joint tenancy with rights of survivorship (JTWROS)
Joint tenancy with rights of survivorship (JTWROS) is a type of property ownership involving two or more people. An asset which is jointly owned with rights of survivorship is controlled by all of the owners during 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.
Property that is titled JTWROS may be owned by spouses or non-spouses. Regardless of whom the joint owners are, the decedent’s interest will automatically transfer to the surviving owner.
JTWROS Characteristics
The primary characteristics of property held jointly with rights of survivorship are as follows:
Several owners share property
Survivorship feature.
Exclusion from the probate estate
When is Joint Tenancy Appropriate?
When is Joint Tenancy Appropriate?
Although there are no hard and fast rules regarding the appropriateness of title, the following circumstances indicate that holding property jointly with rights of survivorship may be appropriate:
To ensure that the property automatically passes to a specific individual upon the owner’s death.
If property is held jointly with rights of survivorship, title passes to the surviving owner immediately upon the death of the first owner.
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 transfer of the property to the surviving joint tenant.
To reduce administrative costs and attorney’s fees.
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 a resultant tax savings for each joint tenant, as opposed to having all of the income reported by a sole owner.
Disadvantages of jointly held property:
Disadvantages of jointly held property:
A joint tenant’s undivided interest can be reached by creditors.
A spouse’s unified credit can only be used to offset estate taxes for 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.
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?
A. Tom’s Estate
B. Jennifer
C. Michelle
D. Heather
Correct Answers: B., C. and D.
Explanation: 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?
A. $30,000
B. $60,000
C. $80,000
D. $90,000
Correct Answer: D. $90,000
Explanation: $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.
John Nash and his wife Susan Nash are joint owners of a property. Susan can terminate the ownership without John’s permission.
A. True
B. False
Correct Answer: A. True.
Explanation: 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.
A mother re-titles the deed to her home as JTWROS with her son. What are the consequences of this action?
A. The mother made a gift of ½ of her home to her son.
B. 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 $4,577,800 in value, in 2020.
C. If the mother becomes incompetent, her son can sell the home to pay for her medical care.
D. If the mother is sued, her creditors cannot reach her son’s JT interest.
E. When the mother dies, her executor cannot sell the house to pay her estate taxes but a unified credit of $4,577,800 is available to offset up to $11,580,000 in estate taxes.
Correct Answesr: A., B. and E.
Explanation: 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.
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 husband and wife. The estate is based on the common law concept of “spousal unity” - that husband and wife are one person. Common law, therefore, dictates that a transfer of property to husband and wife 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 husband and wife are one, most states have abolished tenancy by entirety. In states that still retain this form, spouses usually possess equal rights in the control and enjoyment of the property.
The survivorship feature that is characteristic of joint tenancy property is also found in tenancy by the entirety. Upon the death of the first spouse, the property automatically passes to the surviving spouse, without a will and outside of the probate process.
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 property as tenants by the entirety.
This form of property ownership cannot be held between siblings, parent and child, or business partners.
Property held in tenancy by the entirety can only be severed with the consent of both spouses 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.
Tenancy by the entirety
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.
