The most familiar legal tool in providing direction for the disposition of someone’s property is their Last Will and Testament. Every state has specific requirements to create a valid Will. An additional tool is the creation of a revocable Living Trust. The initial consideration in putting someone in the best position to have their wishes fulfilled and simplifying the process for the survivors is to determine what their property consists of and how it is titled.
What is Property?
There are rights that go with ownership of something that have been likened to a bundle of sticks. Each stick represents a right or group of benefits. The bundle expands as “sticks,” or rights, are added and gets smaller as sticks are taken away.
These sticks can include the right to possess, sell, lease, mortgage, donate, and exercise dominion and control over a thing and the government will enforce those rights. These rights can extend to physical items of personal property like clothes, jewelry or automobiles. The rights can apply to real property including land and buildings. Property also includes things like bank accounts, stocks, copyrights, businesses and more.
An inventory of a person’s “property” is critical. All the property combined is a person’s estate. It is also important to know how that property is owned.
Selection of the property ownership can have effects on taxation, inheritance and probate issues. What follows is a short description of the principles of various types of ownership.
Types of Property Ownership
Sole Ownership: In this type of ownership, the holder of property rights has no obligation to anyone regarding how the property is dealt with. He/she can make all decisions and solely owned property is part of an estate for probate purposes unless it has been placed into a trust.
Tenants in Common: In this type of ownership, there is more than one owner, and each owner has rights to their share of the property, but other owners have no rights in the shares of others. If someone owns real estate with another as a tenant in common, either owner can sell their interest without consultation or consent of the other. In the event of an owner’s death, his share of the property is part of his estate and does not automatically go to the other owner. If property owners do not designate otherwise, they are by default, tenants in common.
Joint Tenants with Rights of Survivorship (JTWROS): In this type of ownership, each owner has an equal share and upon the death of any owner, that owner’s interest passes automatically to any other owner without having to be probated by a court. A JTWROS can be broken by one of the parties by an act inconsistent with joint ownership, the property then generally defaults back to a Tenancy in Common. While most people think of real estate as having this type of ownership, any property may be owned this way. Creation of this ownership interest requires special documentation with specific language.
Tenancy by the Entirety: Typically, this type of ownership is available only to married couples. Some states are allowing this ownership to domestic partners. For tenants by the entirety there are rights of survivorship, with other benefits. These benefits include prohibitions from breaking the tenancy without the consent of both owners. There are generally protections from creditors and limits on the disposition of the property pursuant to bankruptcy.
Trust Ownership: When ownership of property has been placed into a Trust, two of the property sticks from the bundle have been separated. The Trustee holds “legal title” allowing the Trustee to exercise other ownership rights consistent with the directions of the Trust. There is a Beneficiary of the Trust, who holds “equitable title”. The Beneficiary cannot exercise the privileges of ownership, because the legal title is held by the Trustee. Property held in Trust does not become part of a person’s estate for probate purposes, but may be part of an estate for tax purposes.
Estate Planning Considerations of Ownership Types
Each type of ownership has its own legal implications for estate planning purposes and also for life purposes. Each addresses who has decision making authority in exercising ownership rights. This is a consideration while all owners are alive. Each type of ownership affects the way property is transferred upon an owner’s death. These transfers have significant consequences both from a probate standpoint and tax standpoint.
Upon acquiring property be sure to consult your tax advisor or financial planner for guidance on the most effective way to title your property.