My Take
Continued!
Chapter 3
Ah, property.
We humans struggle to get property all of our lives.
Yet, we don’t get to “take it with us”.
Maybe the Indians had it right: do we really
own anything after all???
Enough philosophy!
Whatever our eclectic
thoughts might bear us, we also know in today’s society and world, there is
property owned, which makes it valuable to us.
The question is often how we own (or perhaps better, title)
the property.
But why do we care?
Well, we might not own
property 100%. Maybe we buy it in tandem
with another person, related or not.
What about business ownership
of assets?
What about ownership in a
·
Trust
·
Partnership
·
C Corporation
·
S Corporation
·
LLC
·
Sole
proprietorship
·
Etc???
·
Who reports life
insurance proceeds when I die? Isn’t it
based on who is the beneficiary? Or not?
·
Who owns the time
share we paid too much for?
·
Who owns my
house? The mortgage company? Me? Both?
What’s the difference in
handling, if any, of:
·
separate property,
·
jointly owned,
·
tenants in
common,
·
community
property,
·
inheritances, and
·
other weird things?
As you can see, all of this
can get rather interesting.
I really want you to
concentrate on the community property section of the chapter. The other information is important if we are
dealing with either non spousal property or if
we are dealing with residents in another state.
So, what does it boil down
to?
WHO OWNS TITLE!
Who gets the property when we are no longer on this
fair earth?
Or, do I have the right to give you something during
my lifetime??
Why do we care?
Well, simply put, from an estate or gift point of view, it all boils back
down to the fact the property is accountable to someone originally, and someone
might have to pay taxes on its receipt or gift. Property is assumed to have value, even though it may be difficult to
value. For example, what if I owned the
intellectual rights to a certain computer code?
We assume that the world is
simple. Often it is not.
For example, we normally
assume when people own something together, we tend to think of it as an equal
deal, i.e., my brother and I each own a piece of property 50/50.
What if I actually own 60%
and he owns 40%?
Is my “piece” more valuable
since I seem to own the majority? Maybe, maybe not.
Who owns it if I or he dies
first??
What if I own a royalty
interest in a well and it is .00257%???
Whoa, dude, it is getting
flakey now!
Look over my simplified
definition pages on property elsewhere on the web page (yeah, I was too lazy to
hyperlink it here, sorry).
Tenancy in Common:
Assume the property is equal
with my brother but titled as a TIC
Here I can gift, sell or even
destroy my ½ undivided interest in the property. My brother does NOT inherit the property at
my death, nor I his share. My estate would report the value of ½ of the
fair market value of the property at my death.
Notice that since I don’t own it all, it arguably (and usually isn’t) worth
a true (½ * FMV) of the entirety at my death.
This is called discounting, since it cannot be as marketable UNLESS my
brother also agrees to sell the property.
We will learn quite a bit about the game of discounting.
Joint Tenancy:
Generally, dependant upon the
styling, we own an undivided interest but on death, the other “owner” receives
the property. But, I could give away my interest (not the entirety) before my
death.
The classic example is a
checking account with a spouse. The same
can work with other non family members, if properly styled. Many people try to use this device as a poor
man’s will to avoid probate, and this approach can backfire.
Generally speaking, this
joint tenancy titling is a specialized area that needs to be considered
carefully. You can read the various
examples in the book and see what I mean. I do not intend to spend a great
amount of time here on the subject, as generally we are in a community property
state (although of course we have to consider non spousal and accordingly non
community property in certain situations).
The biggest thing to
get out of this is to be sure to read the rules again before you title anything
either as TIC or Joint Tenancy.
As the text says, generally
estate planners use the term joint tenancy to mean
an ownership form where property passes to the survivor. But realize the LEGAL
definition is slightly different.
Thus a general
legal definition summary:
· Tenancy in Common: Co-ownership of property in which each party owns an undivided interest in the whole property. Passes via will, not to co owner.
• Joint Tenancy: Joint ownership
of property in which each co-owner owns an undivided interest in a portion of the whole
property. Passes to
survivor of the co-owners.
• Tenancy by the Entirety: Joint ownership of property by husband and wife, where neither party can transfer his or her interest in the property without the other’s consent.
• Community Property: Joint ownership of property by husband and wife in which each spouse owns an undivided one-half interest in property acquired during marriage.
• Separate property: non marriage/before marriage/inheritance acquiring of assets.
JTWROS= joint tenancy with right of survivorshipè commonly seen in stock and bonds and brokerage house
accounts. Clearly spells out what is to
happen at death of one member.
Community property:
Eight intelligent states have CP (abbreviation for
Community property).
What is so good about CP is
that it recognizes (but sometimes causes certain confusion on) who owns
property at certain points during a marriage.
You must understand the
differences of legal and/or income/estate tax issues between;
·
Separate Property
·
Community
property
·
Inheritance
·
Income on the
different types of property.
It also gets “hairy” when
folks from a non CP state move to a state with CP. Generally, the property keeps the same nature
it had before moving into the CP state- that is joint/TIC, etc.
The text does a pretty good
job of explaining the weird and normal results of CP ownership.
Let’s look at a simple case
of a husband/wife with no divorce.
|\----------------------------------------------------|\----------------------------------àdeath
Birth Marriage
^ Sp ^Cp
Basis Rules for
Separate property belongs to
the spouse who acquired it, but unless otherwise agreed in a legal instrument,
the income generated by it during marriage is Cp.
All income/property acquired
during marriage is Cp, or a 50/50 deal, period, unless again otherwise agreed
and put into a binding document.
All inheritances are the
separate property of the spouse receiving the property, although again (unless
otherwise agreed as per above) the income from the property is community.
These rules can have a major
impact on what is considered property for the estate tax return, as you might
imagine.
Notice the complications that
can arise: house built during marriage on land owned before marriage by one
spouse, or possibly the house is upgraded; pensions being accrued before and
during marriage; businesses owned before and during marriage, etc. It can get hairy!!!
ALERT: Non Cp state implication
Notice I didn’t mention in
class that in other non CP states,
all
the income you make, property you buy, and other assets you acquire, UNLESS YOU
SPECIFICALLY TITLE IT AS JOINT or TIC, is considered YOUR separate property
despite marriage!!! (I will mention this in the next class)
This “classification” of
property becomes incredibly important when you start preparing an estate tax
return (or even a gift tax return). Why?
Some property may belong to the surviving spouse and thus is not included in
the decedent’s return.
It is even more
crazy if you have a client who originally lived in a Sp state and then
moved to a Cp state!
The property they had before
moving to the Cp state retains the same status as before but all assets/income
acquired in (say)