ownership and transfer of property chapter 7 tools & techniques of estate planning copyright...

Ownership and Transfer of Property

Chapter 7Tools & Techniques of

Estate Planning

Copyright 2011, The National Underwriter Company 1

Ownership of Property

• Outright• Life Estate / Remainder• Tenancy in Common• Joint Tenancy with Right of Survivorship• Tenancy by the Entirety• Community Property• Totten Trust, POD, TOD



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• Outright Ownership– Hold title to the property with the right to use, possess, and

enjoy the property– Right to alienate or transfer property during life or at death

• Life Estate– The right to use, possess, and enjoy the property for life

• Remainder Interest– Receive property after person with a life estate dies



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• Tenancy in Common

– Form of co-ownership

– Each tenant owns share in proportion to contribution (or gift or inheritance)

– Right to alienate or transfer share during life or at death



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• Joint Tenancy with Right of Survivorship

– Form of co-ownership

– Each tenant shares in proportion to contribution (or gift or inheritance)

– At death, interest automatically passes to remaining joint tenants

– During life, a joint tenant can sever tenancy or transfer interest



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• Tenancy by the Entirety

– Form of co-ownership exclusively for spouses

– Each spouse has an undivided interest

– At death, property automatically passes to other spouse

– While alive and married to each other, neither spouse can sever the tenancy without the consent of the other spouse



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• Community Property– Community property states include: Alaska, Arizona,

California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin

– A form of co-ownership between spouses– Each spouse has a one-half undivided interest in property

acquired during the marriage– At death, right to alienate or transfer one-half interest– During life, need spouse’s consent to alienate or transfer

interest



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• Community Property (cont’d)– Community property remains community property when the

spouses move to a non-community property state– Noncommunity property includes

• Property acquired prior to marriage• Property acquired by one spouse by gift or inheritance• Property acquired prior to move to community property

state– Spouses can draft an agreement to designate property as

community or non-community property



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• Totten Trust– Bank account as trustee for another person– Generally revocable– At death of trustee, donee receives bank account

• Payable On Death (POD) Account– Bank account– At death of owner, named beneficiary receives POD account

• Transferrable On Death (TOD) Account– Securities account– At death of owner, named beneficiary receives TOD account



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Transfers of Property

• Lifetime– Outright Gift– Trust

• At Death– Operation of law

• Joint tenancy with right of survivorship– Contract with beneficiary designation

• Life insurance, annuities, retirement benefits– Wills

• Probate– Intestate succession

• Die without a valid will• Probate



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• Wills– Revocable until death– Instructions on how to dispose of a person’s property after death– Can name executor or guardian for minor children– Formalities for execution vary among states

• Usually typed or written

• Two witnesses required in most states

• Testator must have the capacity to make a will at the time of execution



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• Testamentary capacity– Must be of legal age, at least 18 in most states– Must understand the extent of his property

• e.g. knows he owns a home in Florida, two life insurance policies, retirement benefits, one bank account, three mutual funds, etc.

– Must understand the natural objects of his bounty• e.g. knows he has a spouse and three children

– Must understand the nature of his dispositions• e.g. knows his spouse Mary gets the house, his brother Tom

gets $10,000, and his sister Jane gets the antique ring, with Mary receiving the remainder of everything else



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• Types of legacies (disposition of property from testator to legatee)– Specific legacy – Specific piece of property

• All personal and household effects to wife, Rachel

• 1962 Corvette to niece, Heather

• Note: If the specific property does not exist at testator’s death the legatee receives nothing in most states



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• Types of legacies (cont’d)– General legacy – Specific value or amount

• $10,000 to my nephew, Ralph• Note: If there is $10,000 worth of property remaining after

specific bequests, the general bequest will be satisfied even if other property has to be sold

– Residual legacy – Remainder• Disposes of all remaining property not disposed of by

specific or general legacies• Often the largest share of the estate



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• Lapse– If a specific or general legatee is not alive at the testator’s

death, the legacy lapses and passes to the residual legatee– Some states provide that if certain related legatees are not

alive, then the legacy passes to descendants of the legatee

• Tax-Apportionment Clause– Provision directing which legacies are to bear the burden of

death taxes



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Review Will Periodically

Questions to ask:– Does the testator still live in the same state?– Does the testator own real estate in another state triggering

ancillary probate?– Is the testator still married to the same person?– Does the testator wish to change any beneficiaries? Have

any beneficiaries died?– Does the testator have any new relatives, such as a

newborn child?– Has the state law on wills changed?– Have tax laws or assets changed?



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Limitations on disposition of property:– Spousal statutory share

• Election against the will

• 1/3 to 1/2 of the estate

– Antenuptial (prenuptial) agreement– Homestead rights– Family allowance– Pretermitted or omitted heir statutes– Mortmain statute limiting charitable contributions



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• Intestate succession– Person dies without a valid will or only a partially valid will– State law provides rules for who will inherit how much

based on their relationship to the decedent (varies)• For example, spouse receives ½ of estate and the other ½ is

divided equally among the children

– Default will– Doesn’t apply to

• Property passing by contract to beneficiary

• Property passing by form of ownership to survivor



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• Trusts– Fiduciary trustee administers trust for the benefit of one or

more persons known as beneficiaries– Person creating the trust is called the settlor, trustor, or

grantor– Property held in trust is called corpus or res– State law controls the creation, operation, and termination

of a trust



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Types of Trusts:– Testamentary

• Irrevocable• Created at death

– Revocable intervivos (established during life)• Grantor trust rules apply for income tax purposes• Part of grantor’s gross estate at death



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Types of Trusts:

– Irrevocable• Generally, retained income is subject to compressed trust

income tax rates and distributed income is taxed to the beneficiaries

– Unless grantor or grantor’s spouse retain rights causing trust income to be taxed to grantor

• May trigger gift taxes upon transfer of property to trust• Generally, not included in grantor’s gross estate if grantor gave

up all rights and control



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• Rules against perpetuities– Interests in property must vest no later than lives in being plus

21 years and nine months– Uniform statutes add 90 year alternative period– A few states have done away with rule against perpetuities

• Spendthrift provisions– Attempt to limit the ability of the beneficiary to squander funds– Attempt to keep beneficiary’s creditors from reaching the funds

• State laws may restrict the grantor’s ability to prevent creditor’s from reaching the beneficiary’s interest



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Typical spendthrift provisions:– Prohibition of beneficiary transferring the beneficiary’s

interest– Forfeiture of beneficiary’s interest if beneficiary attempts to

transfer interest– Distributions of income or principal to a beneficiary limited to

support of the beneficiary (or to provider on behalf of the beneficiary)

– Distributions to beneficiary at the trustee’s discretion– Prohibition against creditors reaching beneficiary’s interest

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