HOW YOU OWN PROPERTY AFFECTS ESTATE PLANNINGHow your property is titled will affect what happens to your property when you die. Therefore, it is very important to examine how property is owned. This is especially true if you are married and live in or have lived in a community property state. Four common forms of ownership that will be discussed in this article are the following: Property Owned in Trust, Property Owned in Individual Name, Co-Ownership of Property and Community Property.
Property Owned in Trust
As was discussed in a previous article, the use of a revocable trust has become a popular way to own property. With the help of a competent estate planner, an individual or couple can form a trust and then change ownership from their individual capacity to their capacity as trustee of their trust. Because the trust now owns the property, if something happens to the individual, the successor trustee named in the trust assumes ownership and manages or distributes the property as specified in the trust.Property Owned in Individual Name
There are advantages and disadvantages of owning property in your individual name. One disadvantage of sole ownership is that if something happens to you, a probate proceeding will probably be necessary to clear title to the property. For example, real estate that you may want to pass to your wife or children must be transferred by a deed. If you are dead, you cannot sign a deed. If the deed is in just your name, it will be necessary to have a personal representative appointed by the court. After being appointed by the court, the personal representative will then have the authority to sign a deed conveying property to your beneficiaries.The biggest advantage of sole ownership (or ownership in trust) is that you have control over your property. If property is owned with another individual, the other person can affect your ownership. If the other owner desires to sell the property, he or she can sell their interest. Additionally, the property can be subject to creditors of the other owners. This potential loss of control and potential creditors claims is a problem of co-ownership. For many older individuals, these concerns are a major reason why co-ownership with a child or children should be avoided. Many property owners have been surprised to learn that after placing their child's name on their property, the property they once owned outright is now subject to claims of their child's creditors or child's spouse in the event of a divorce. Co-ownership of property with non-spouses is almost never the best planning alternative.
Co-Ownership of Property
Ownership as Joint Tenancy with Rights of Survivorship and ownership as Tenants in Common are two common forms of co-ownership in Utah. A main difference between these two forms of co-ownership relates to what happens when one co-owner dies. If the property is owned as Tenants in Common, the surviving co-owner does not automatically own the deceased owner's interest. In contrast, if property is owned as Joint Tenants, the surviving co-owner will automatically own the deceased owner's interest. Significantly, the surviving co-owner of property owned in Joint Tenancy will inherit the property of the deceased owner regardless of what the will of the deceased owner states. Because many people do not understand the significance of owning property as Joint Tenants, they mistakenly believe their will "supersedes" all other considerations. This misunderstanding has resulted in many estate administrations that were very different from what the deceased person intended.Additionally, because the difference between Joint Tenancy and Tenants in Common is very subtle, many people that own property as Tenants in Common are surprised to find out that the surviving co-owner does not automatically inherit the property. Because the surviving co-owner of property held as Tenants in Common does not automatically receive the property upon the death of the other owner, a probate proceeding will be required. The probate court will require that the property be conveyed pursuant to the terms of the deceased owner's will or the state intestate statute. Because the result as to whom will receive a deceased co-owner's property can be very different depending on whether the property is owned as Joint Tenancy or Tenants in Common, it is critical to determine and understand the effect of all forms of co-ownership.
Community Property
Community property is a form of marital property that exists in nine states. If you were married and acquired assets in California, Nevada, Arizona, Washington, Idaho, New Mexico, Texas, Wisconsin or Louisiana, you likely own community property. Although Utah is not a community property state, many couples in Utah own community property. These couples have either purchased real estate in a community property state or at some time during their marriage they lived in a community property state. For estate planning purposes, it is often very important to maintain the community property status of your property.Maintaining the community property status of property can save taxes. Briefly stated, the surviving spouse can inherit community property from the deceased spouse and receive a "full stepped-up tax basis. What that means is that the surviving spouse can sell the property and only have to pay a capital gains tax on the appreciation from the date of the deceased spouse's death to the time of sale. Therefore, if the surviving spouse sells property shortly after the time of the other spouse's death, there will be no capital gains tax. Significantly, this is not the case with co-owned, marital property that is not community property. If the co-owned, marital property is not community property, the surviving spouse would inherit the property with only a "half stepped up tax basis." This means that the surviving spouse would have to pay a capital gains tax on half the appreciation from the time the couple originally acquired the property.
This is a brief review of different forms of property ownership. There are many other issues that should be considered when determining the form of property ownership that is right for you and the effect your current titling of property has on your estate plan. In conclusion, it is very important that these and other issues related to your titling of property be discussed when you do your estate plan.
Jeffery J. McKenna
Attorney licensed and servicing
clients in Utah, Nevada and ArizonaCopyright © 1999-2010 Barney McKenna & Olmstead, P.C.
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