Individual Property Ownership

Who owns your property? What is the form of ownership? These are two questions your financial planner and/or attorney will ask. Often individuals are unable to answer with certainty.

The ownership of property should be carefully evaluated. Failure to structure ownership properly can lead to problems in the event of a sale, a divorce, or the death of the owner.

Estate planning frequently involves redistributing ownership of assets between spouses to take advantage of a variety of tax saving opportunities. One of the most common opportunities for estates valued over $600,000 ($625,000 in 1998) is the utilization of the estate tax unified credit -- the first spouse to die can transfer up to $600,000 to non-spouse beneficiaries free of federal estate tax. If there are not enough assets to distribute, a properly drafted will that calls for the full utilization of the unified credit will not be effective.

Aspects of Ownership: There are two parts to property ownership -- the legal owner has title that enables him/her (or joint owners) to transfer the property, and the beneficial owner has the right to certain rewards of ownership (for example, income interest). Following is a summary of the types of ownership and general rights of owners or beneficiaries.

Type of Ownership	Legal Title	Beneficial Ownership	Comments
Sole Ownership	Yes	Yes	One individual
Joint Tenancy	Yes	Yes	Two or more individuals
Tenancy in Common	Yes	Yes	Two or more individuals
Tenancy by the Entirety	Yes	Yes	Between spouses only
Trust/Trustee	Yes	Yes	Trustee has title for the beneficiaries
Beneficiary	No	Yes	One or more individuals

Community Property States: Ownership rules are generally governed by the state where the property is located. Most states are common law states; however, there are nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin).

Property owned in common by husband and wife during their marriage is referred to as community property. In community property states, property acquired by one or both individuals during a marriage is considered the property of both parties, with each spouse owning an undivided one-half interest. Regardless of which spouse acquires the property, title to half the acquisition passes to the other spouse by operation of law. Any property brought into the marriage, inherited, received by gift, or agreed by both spouses to be separate property is considered property solely of the owner/spouse (if properly documented as such).

Sole Ownership: One individual having both legal and beneficial ownership is referred to as sole ownership. This arrangement is generally preferred for estate tax planning purposes because it facilitates the direction of property (either during the owner’s lifetime or after death).

Joint Tenancy: In a joint tenancy, two for more persons own property together, with each owner enjoying the same rights to the property. Joint tenancy creates the right of survivorship for the joint owners (tenants). If one dies (or terminates his or her interest), all rights pass equally to the remaining joint tenants. Title to the property is held by the group -- not by the individuals who make up the group. Most states require clear documentation for a joint tenancy with right of survivorship.

Joint tenancy ownership can cause several problems if used improperly. For example, if parents give property to their children in joint tenancy to "keep the property in the family," the death of one or more of the children will result in the widowed spouse (and any of their children) being eliminated from ownership of the property. The use of a trust would alleviate this problem. Additionally, the uncertainty as to who can have final ownership might affect the marketability of a joint tenancy interest.

Tenancy in Common: This form of ownership allows two or more persons to have an undivided separate interest in the property with a common right of possession. None of the tenants in common own a specific part of the property (only an interest in the entire property). There are no rights of survivorship. Unlike joint tenancy, a tenant in common can transfer his/her interest (sale or gift) in the property to anyone during his/her lifetime or upon death. This arrangement provides more flexibility than other forms of joint ownership.

Tenancy by the Entirety: A distinct type of property ownership between a husband and wife is a tenancy by the entirety. It is similar to a joint tenancy with right of survivorship, except a part interest cannot be transferred to another individual without the consent of both spouses. The husband and wife can mutually agree to convert to tenancy in common. In most common law states, a joint purchase of property by a married couple is usually classified as tenancy by the entirety (unless an election is made to avoid tenancy by the entirety).

The implications of tenancy by the entirety (as well as joint tenancy with the right of survivorship) should be carefully analyzed. Regardless of the terms of a will, the property will go to the surviving spouse upon the death of a spouse -- thereby reducing the size of the decedent’s estate, and possibly resulting in only partial utilization of the $600,000 exclusion. If the first spouse to die has children from a previous marriage, those children could be eliminated from the inheritance (because ownership transfers to the surviving spouse).

Ownership rules differ significantly among the states. These are some general thoughts to consider. Your financial, tax, and legal advisors can provide additional information and should be consulted before any action is taken.

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	Who Owns What? Personal Finance Advisor by Deloitte & Touche OnLine September 1, 1997