ESTATE PLANNING - OWNERSHIP DESIGNATIONS
 
 

PROPERTY OWNERSHIP

Because estate planning deals with the eventual transfer of property to others, the way in which you own property is critical. The following section looks at how you can designate property ownership in the best manner to meet the needs of your heirs and to minimize estate taxes.

Transferring Property to Your Heirs

A well-designed estate plan allows your estate to transfer property to your designated beneficiaries with a minimum of fuss and a maximum of tax savings. Assets that you completely or partially control are usually included in the estate, and shifting the title to these assets to your spouse or heirs (either in total or as co-owners) almost always reduces the estate tax burden and ensures a speedier transfer of assets. But this course has an overwhelming disadvantage: Such transfers of title usually must be irrevocable. Also, you could have to pay gift taxes if you transferred ownership of a lot of assets to anyone but your spouse.

Defining ownership of property also defines each owner’s or co-owner’s rights to and limitations regarding that property. Generally, each form of ownership tends to maximize one advantage (such as control), at the expense of another (such as reduced tax liability).

The following list summarizes the important considerations that you should keep in mind when deciding on a particular form of property ownership:

 v Sole Ownership. Sole ownership is outright ownership. Sole owners can sell the property, or give it away. They can pass it on to heirs in any way they wish.

 v Joint Ownership. Joint ownership means that two or more persons have ownership rights in the property. There are two kinds of joint ownership:

      Joint Tenancy with Right of Survivorship can exist between anyone, not just husband and wife. The main feature of joint tenancy with right of survivorship is that if one of the joint owners dies, interest in the property automatically passes to the other joint owner or owners.

      Tenancy by the Entirety is similar to joint tenancy with right of survivorship, but there are some important differences. First, tenancy by the entirety can exist only between spouses. Also, in many states, survivorship rights cannot be terminated without the consent of all joint owners.
 

The advantages of joint ownership are that it is convenient and often works well for small estates since it avoids probate and thus provides the surviving family member with immediate access to the decedent’s property. Joint ownership of property may also protect the property from being lost to a lawsuit during the owner’s lifetime (see below).

For estates that will be subject to estate taxes, however, joint ownership may have adverse estate tax consequences. Also, anyone transferring property from sole ownership to joint ownership usually loses full control of property during his or her lifetime and relinquishes the power to unilaterally decide who will inherit it. Joint ownership arrangements are difficult to unwind — both legal and tax problems may arise. Finally, a joint tenancy between non-spouses may incur income and estate taxes.
 

vTenancy in Common. Tenancy in common differs from the other kinds of joint ownership primarily in that tenants in common do not have the right of survivorship. Instead, a tenant-in-common’s interest in a property passes at death to his or her beneficiaries. Also, while joint tenants and tenants by the entirety always have equal interests, tenants in common can have unequal interests. For example, one tenant in common could have a 65 percent interest while the other has a 35 percent interest.
 
 

vCommunity Property. Under community property laws, each spouse is co-owner of any property that is acquired by either spouse during the marriage if a joint effort was made in acquiring the property. Upon death, each spouse can dispose of only his or her half of the community property by will. The states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington all treat spousal property in this manner. Similar legislation is in effect in Wisconsin. Community property laws in each state are not uniform, so if you are a resident of a community property state, be sure to learn about the regulations.
 
 

Insulation From Lawsuits

If you are unable at any time to pay financial debts, the properties that you own individually are subject to creditors’ claims. If you are on the receiving end of a negligence, malpractice, or other lawsuit against you personally, your assets may also be seized by a court order. If, however, the property is held in joint ownership or is owned by some form of irrevocable trust, it may be partially or completely immune from these claims simply because of a foresighted joint ownership status.
 
 

There must be a legitimate reason to transfer ownership from one form to another besides avoiding personal financial obligations. In other words, the deliberate transfer of assets into another form of ownership merely to avoid paying your debts is considered fraudulent and may be overturned by the court. To protect assets from litigation, obtain sufficient umbrella and, if applicable, professional liability insurance coverage. In many circumstances, joint, trust, and community ownership ensures the safety of your property for your spouse and heirs. But remember that this assurance must be weighed against the partial or total loss of control and convenience that accompanies joint ownership arrangements.