What Is the Best Form
of Property Ownership for Me?
In planning your estate,
it is customary to consider wills and trusts (as well as intestacy) as a means
of property distribution. As a matter of fact, the manner in which you hold
title to your assets may supersede provisions contained in other transfer
documents. Likewise, significant tax benefits can be gained (or lost) depending
on the characterization of your property.
Let’s take a look at the
general classifications of ownership.
Sole Ownership
Sole ownership occurs when
one owns a complete interest in property. Ownership is passed by the typical
transfer documents, or by the laws of intestate succession. The complete
interest is included in the estate of the decedent. Because of this, the
beneficiary receives a full step-up in basis. This, in essence, brings up the
original purchase price to the fair market value, thereby eliminating a capital
gain.
Joint Tenancy
Joint tenancy exists when
two or more persons share equal, undivided interests in property. Joint tenancy
is not limited to spouses. Anyone can share joint interests, but there are tax
benefits when this arrangement is shared only between husband and wife
(qualified joint tenancy).
A joint property interest
cannot be passed through traditional documents, such as a trust or a will.
Ownership of a joint interest passes by “operation of law” to the surviving
joint owner(s). Further, property held in joint tenancy will not be subject to
probate.
Under qualified joint
tenancy, half of the property is included in the first decedent’s estate.
Because of this, the surviving spouse obtains a stepped-up basis only on the
first decedent’s half of the property.
If any nonspouses
participate in joint ownership, the entire value of the property is includable
in the decedent's estate, reduced to the extent that the estate can prove that
the surviving tenant(s) contributed to the cost of the property.
Another form of joint
ownership — tenancy by the entirety — is similar to joint tenancy, but it
can only be created between husband and wife. Unlike joint tenancy, an interest
cannot be transferred without the consent of the spouse. Tenancy by entirety is
only recognized in certain states.
Tenancy in Common
Tenancy in common provides
an undivided interest in property between two or more people. Unlike other forms
of joint ownership, however, these interests can be owned in different
percentages.
A tenant in common can
utilize the traditional transfer documents, but interest cannot be passed by
operation of law.
The amount includable in
the estate of a decedent is based on his or her percentage of ownership. The
beneficiary of the property interest receives a stepped-up basis on that portion
of the property. It is important to remember that the beneficiary can be chosen
by the decedent. This is in contrast to joint tenancy, under which the surviving
joint tenant(s) automatically inherit the interest of the decedent.
© 2003 Emerald Publications
