Forms of Ownership
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Forms of Ownership
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Forms of Ownership for Property By Diana Greshtchuk
In planning for your estate, one of the most important topics that is often overlooked is how property is held. Forms of ownership in the titles and deeds to property can mean the difference between a probatable and non-probatable estate, so it definitely deserves some attention. Just as a side note, many individuals engaging in estate planning try everything possible avoid probate. Probate is the legal process where an estate goes to court for proper administration due to the level of assets in the estate (in 2002, all estates worth more than $1million will go through probate). All assets are dispersed according to wills and trusts during this process, which can be long and costly. One of the other main reasons to avoid probate is that all court documents are open to the public, so your entire estate, how much money you have, where, and your family dynamics could be disclosed in these documents. That is reason enough right there to avoid probate at all costs. For the sake of this article, we’ll assume the piece of property is a house owned by Bubba and Bambi*, with a fair market value of $150,000 in Chico, California. The first form of ownership is called Tenants in Common. With this type, each person is presumed to have an individual interest in the property. Basically, both Bubba and Bambi would have right to full possession and enjoyment of that property, and the relationship between them is very much like a partnership. Unless otherwise stated in writing, each partner is assumed to have 50/50 interest in the property. With Tenants in Common, for example, Bubba would be able to pass his interest into his estate as opposed to having ownership automatically transfer to Bambi at his death. This is important for estate planning because if Bubba’s interest can be willed, that means it is in his estate and therefore subject to estate tax. The second form is known as Joint Tenancy. With this type of ownership, all tenants have an equal interest in the property and all must be present at its inception. Any owners joining at a later date would be considered Tenants in Common with Bubba and Bambi, the joint tenants. One important feature of Joint Tenancy is a Right of Survivorship clause. This Right of Survivorship clause says that if one of the tenants dies, the surviving tenants would automatically own the deceased tenant’s share. This is a very important tool to use when planning an estate because this interest in the house cannot be put into the decedent’s estate and all property in this title passes in a transfer outside of probate. Another option for ownership of the house is Tenants in the Entirety. Since this form of ownership is not recognized in California, we won’t spend too much time on it. However, it’s good to know it exists, if one decides to purchase property in another state. Probably the most common form of ownership in California is Community Property, which is usually in the situation that Bubba and Bambi are husband and wife. Community property is usually acquired during marriage and actually only applies during the time of marriage (if divorced, it’s no longer community property). Community property does not include inheritances of one spouse or gifts made specifically to one spouse. As an important side note, community property as a form of ownership is not recognized in all states. California is one of the ten states that recognize community property as a form of ownership. Quasi-Community Property is created when one spouse acquires property in a non-community property state (Bambi bought a home in Florida), after which that spouse moves to a community property state (like California). In the event that they get a divorce in California, that property that would be community property if it were in a state that recognized that ownership is basically treated like community property. So Bambi can own a home that would normally be considered community property in California, but since it’s in Florida, it’s only quasi-community property. There is also Community Property with the Right of Survivorship clause. This is helpful in family estate plans because it’s an automatic transfer to the spouse. So it is a transfer that occurs outside of probate. This is probably the best way to go for those families where the kids are all from the same marriage and the property division is agreed upon beforehand. There is a huge tax advantage to holding property in this form – when the first spouse dies, the property receives an automatic step up in cost basis to the current market value. So if Bubba and Bambi bought the home in Chico originally for $100,000, then normally, capital gains tax would be incurred on the $50,000 if it were sold now. But the step up in cost basis allows the surviving spouse to claim the new cost basis as $150,000. So if they turned around and sold the house, no capital gains tax would be incurred because the basis is equal to the fair market value. There is no on perfect way for Bubba and Bambi to hold their property. All they can do is figure out how that form of ownership would affect their overall estate plan and choose the one with the most benefits. If you have further questions about your options, don’t hesitate to consult an estate planning professional for advice/help.
* All names and situations used in this article are purely fictional and not intentionally based on any true life people. |
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