Traditional Methods Of Estate Planning - San Diego Estate Planning Attorneys

Ownership of Assets

· What does “title” mean in relation to property ownership?
Title is the legal concept of ownership. When you take “title” to any piece of property, you specify what type of legal rights you wish to hold in the property and what legal rights others have in the same property. Title to property consists of two, often confused, subparts: legal title and beneficial title.
Legal title, quite simply, reflects who owns the property for the purposes of buying, selling, or otherwise disposing of the asset. Legal title does not, in itself, confer the right to use or enjoy the property. The beneficial title owner retains that right. For example, if you were to lease an automobile, the leasing company would retain legal title to the car. That is, you could not sell or otherwise transfer the car because the leasing company remains the legal owner on the formal written title to the automobile. Nevertheless you, as lessee, have exclusive beneficial, or equitable, title in the car. You, and not the leasing company, have the full right to drive, use, and enjoy the car.
Legal title of many assets is evidenced by a written document naming the owners and the form in which they own the asset—joint tenancy, tenancy in common, and so on. Title to real estate is evidenced by a deed naming the legal owners and describing the property. Title to stock is evidenced by a stock certificate stating in whom legal title is vested. Title to bank, brokerage, mutual fund, and IRA accounts; insurance policies; and certificates of deposit is reflected in an agreement the individual signed when he or she established the account or purchased the asset. Quite often you can determine the legal title to an asset simply by inspecting the bank or brokerage statement, the stock certificate, the insurance policy, and so on.
Beneficial title, on the other hand, is not so easily determined. By simply identifying the legal registered owner of property, one cannot be certain as to the identity of those having the right to use or enjoy the property. Fortunately, however, for estate planning purposes, you need only be concerned with what you own and in what form you own it.

· What are the most common forms or methods of owning (titling) property?
The six most common methods of property ownership are:
· Individual (fee-simple) ownership
· Individual ownership with beneficiary designations
· Joint tenancy with right of survivorship (in some states called tenancy by the entirety if between spouses)
· Tenancy in common
· Trustee ownership (The trustee of a revocable living trust holds legal title to the trust property, while trust beneficiaries hold beneficial title to the trust property.)
· Community property

· Why should I be concerned about the title to my assets?
Knowing who has the title to all of your assets is essential to successful estate planning. Title defines the legal owner or owners.
For those who use a will as the primary basis of their estate planning, title to most, if not all, of their assets usually remains in their names until death. In such circumstances, most of those assets will have to undergo probate for the title to be transferred to others.
Holding title to an asset jointly with right of survivorship with another person has traditionally served as a simple estate planning technique. When title to an asset is held jointly with right of survivorship, at death, title to the asset vests in the survivor or survivors—without probate or other proceedings. The advantage of holding title jointly with another is that doing so is inexpensive and simple. The principal danger is that it may lead to unintended and unpleasant results, such as when one of the owners dies unexpectedly and the heirs of the decedent are left with nothing. Other forms of joint ownership of title include tenancies by the entirety (a form of joint ownership for married couples in some states) and tenancies in common (in which property is held jointly, but each owner may transfer his or her part interest to third parties at death). Your attorney will suggest different planning alternatives depending upon the type of asset and how it is titled.

· What if don’t know how I hold title to my assets?
How you hold title, or the form in which you hold title, to any asset, whether it be real estate, stocks and bonds, or automobiles, can be determined easily from documents you have. Obtaining that information is one of the first tasks in proper estate planning. For example, if you own real estate, the deed to that real estate will reveal how you hold title to it. Stock and bond certificates, or the documentation for the accounts in which you may hold those items, and the documentation for your bank accounts will reveal the forms of title. If you have questions, you should ask your estate planner to help you.

Individual ownership of property

· How does individual ownership work, and what are the advantages and disadvantages of owning property this way?
Individual ownership, legally known as fee-simple ownership, means you own both legal and beneficial title to the asset. For example, if you own a bank account, stock, or a car in your sole individual name, you have both the right to control and sell the asset (legal title) and the right to spend the money in the bank account, use the proceeds from the stock sale, or drive the car (beneficial title).
Accordingly, the first advantage of fee-simple ownership is that, because you have full and exclusive ownership of the asset (legal and beneficial title), you can control and distribute the asset at your death in your will. A second advantage is that your heirs will receive a step-up in the cost basis of the property to the fair market value of the property as of your date of death. For example, if you sold this property, you would pay the capital gain tax on the difference between the cost basis and the fair market value. Cost basis is essentially the purchase price of the property, plus any improvements, less depreciation. The cost basis for your heirs, however, will be the fair market value of the property as of your date of death. A step-up in basis can result in significant capital gain tax savings to the person who inherits the property.
There are some disadvantages of individual ownership. Solely owned property may be subject to both living and death probates in the event that the owner becomes disabled and dies. This can create unnecessary expenses and delays. The public nature of the probate process may also cause problems for the owner or for the person who ultimately inherits the property.
Joint tenancy with right of survivorship

· What is joint tenancy with right of survivorship property?
Most married couples own their property as joint tenants with right of survivorship, often referred to as joint tenancy. Frequently you will also see an elderly or infirm person name a child or close friend as a joint tenant on a bank or brokerage account to facilitate the payment of bills and expenses.
The key element in joint tenancy is its survivorship quality. The last to survive of the joint tenants receives the entire property, thus dissolving the joint tenancy and vesting both legal and beneficial title in the survivor individually. As such, joint tenancy ownership of an asset dramatically affects to whom the asset will be distributed at death.
For example, if you own real estate in joint tenancy with another person, at your death the asset will pass automatically to the surviving joint owner by operation of law.

· What is tenancy by the entirety?
Tenancy by the entirety is a type of joint tenancy with right of survivor-ship. It is available only in some states and only between spouses.
Tenancy by the entirety’s unique characteristic is that the creditor of one spouse cannot take any part of the property to satisfy the spouse’s debt. The creditor may only be able to get a lien on the property. In some states, this creditor protection is not permanent. When the property is sold, its value may no longer be protected. However, if the proceeds are paid to an account which is also owned in tenancy by the entirety, the proceeds may escape seizure by the creditor.
Except for this creditor protection and the fact that it is available only in some states and exclusively for spouses, tenancy by the entirety is almost identical to joint tenancy with right of survivorship.

· Are there any disadvantages to owning property jointly with right of survivorship?
Owning property in joint tenancy with right of survivorship has several drawbacks. For example, joint tenancy:
· Only postpones probate
· Supersedes your will or trust regarding distribution of the jointly held property
· Can increase estate taxes
· Can lead to capital gain tax
· May cause some children to be disinherited
· May create unintended heirs
Other problems arise if you own an asset in joint tenancy with one of your children. Joint tenancy with a child:
· Can lead to gift taxes
· Can restrict your ability to sell or transfer the property
· Subjects the property to possible claims against it by the children’s creditors
· Might prevent other children from sharing in the property after your death

· Since joint ownership will pass my assets to another joint owner immediately upon my death without probate, isn’t this a good arrangement?
On the surface, joint ownership may appear to be a good and simple arrangement for one’s assets since jointly owned assets will immediately pass to a joint owner free from probate. However, joint ownership can (and typically will) have a number of traps hidden within:
1. When you name a person as a joint owner of an asset, you are subjecting your asset to the liabilities and creditors of the other person. As an example, if your chosen joint owner enters into a divorce proceeding with his or her spouse, your asset may become involved in the divorce proceeding!
2. The naming of a joint owner may be construed as a gift to the chosen joint owner at the time you name the joint owner. Thus you may be generating a gift tax obligation if the portion you transfer exceeds the gift tax annual exclusion.
3. In joint tenancy ownership with one or more persons other than a spouse, the full value of the assets will be included in the deceased joint owner’s estate unless it can be proved that the other owner or owners paid for their shares in some way. When the full value of the joint property is included in one owner’s estate but passes to the other owner or owners, it is the worst of all worlds: the decedent’s estate has all the taxes but none of the property
4. If you or your chosen joint owner should become mentally incapacitated, a court proceeding will likely be necessary and the court will assume the role of the incapacitated joint owner. Once the court assumes this role, any transactions regarding the joint asset instantly become subject to complex and arduous rules.
5. A joint tenancy arrangement completely bypasses any provisions you may leave in a will or a trust. This is true even if your will or trust addresses the purpose of the joint tenancy arrangement.

· Is transferring property into joint ownership with my children a good way to avoid probate?
No. Transferring property to your children subjects your property to the claims of your children’s creditors and could be a taxable gift.

· I own joint tenancy property with my brother. Upon my death, can I leave my interest in this property to my children?
No, you cannot. A will or a trust cannot control joint tenancy property. When one joint tenant dies, the property, by operation of law, passes to the surviving joint tenant. This greatly misunderstood concept of joint tenancy causes no end of problems and heartache for families.

· How can joint tenancy result in increased estate taxes?
Joint tenancy between spouses can cause increased estate taxes in taxable estates because the property automatically passes to the surviving spouse tax-free under the marital deduction. Marital-deduction property is not subject to estate tax, so the first spouse to die cannot take advantage of his or her applicable exclusion amount.

· I have heard that joint tenancy can cause children to be disinherited. How can this happen?
If you and your husband own property as joint tenants and you die, he owns all the property by law. If your husband happens to remarry and puts the property in joint ownership with his new wife and then dies, she owns the property by law and your children will be disinherited. The property belongs to her, and she can do anything she wants with it.

· How can joint tenancy result in “unintended heirs’?
Here is an example: Dad, about 62 years old, was obsessed about losing everything to a nursing home. His father had to spend his entire estate on nursing home care, and Dad was determined not to let this happen to himself. Dad focused on this to the exclusion of all other estate planning considerations.
Dad talked to a local attorney who did not have much estate planning experience. This attorney recommended that Dad transfer ownership of his home by deed to his two daughters as joint tenants with right of survivorship. Dad retained no ownership interest in his home, relying instead on the loving relationship he had always had with his daughters to allow him to continue living there as long as he could.
Both daughters were married and lived in another state. The older daughter, Ann, had one daughter, Dad’s only grandchild. Ann and her husband had a well-thought-out, living trust—centered estate plan. The younger daughter, Betty, and her husband were newlyweds and had no planning. Dad liked Ann’s husband but had a very bad relationship with Betty’s husband.
Tragedy struck. Ann and Betty were killed in an automobile accident. You might think that since the sisters died together, Ann’s joint tenancy interest in the home would go to her husband and daughter under the terms of her living trust. But there was litigation in which Betty’s husband proved that the truck killed Ann first and then Betty about .02 seconds later.
The court held that the laws of joint tenancy controlled instead of Ann’s trust. When Ann died, her part of the remainder interest in Dad’s home passed automatically to Betty. When Betty died, her remainder interest passed by the laws of intestacy to her husband. Ann’s and Betty’s entire remainder interest passed by intestacy to Betty’s husband, who now owns the home and can legally charge Dad rent or even evict him if he chooses to do so.

· I am single and I would like to avoid probate upon my disability or death. Why shouldn’t I just retitle my home in joint tenancy with right of survivorship with one or more of my children?
If you die first, your estate will in fact avoid probate. Of course, when your child later dies, the property could be part of your child’s probate estate.
If your child predeceases you, the property will automatically return to you (outside of the probate system), leaving you with no provision as to where the property will ultimately go upon your death. You would be right back where you started, and by then it might be too late to do any further planning.
Also, if either you or your child is disabled and cannot handle your own financial affairs, a living probate might be required—a guardianship or conservatorship—with respect to the entire property.
Further, you might create a taxable gift when you put your child’s name on the deed with you as a joint tenant. Retitling your home in such a manner is considered a gift because, among other things, after the retitling either you or your child can go to court and obtain an order to divide the property into two separate parcels. So retitling your home in joint tenancy with your child is treated the same as dividing your home into two parcels and giving one parcel to your child. Depending on the value of the property, you might be required to pay a gift tax. (Generally, if the value of a gift exceeds the annual exclusion, you will incur a gift tax. If the jointly held property is a bank account or brokerage account in street name, the gift is not deemed to have been made until the child withdraws the funds.)
Another problem with retitling your home in joint tenancy with your child is that you may lose control over your home, because your child as a joint owner must consent to any sale or transfer of the property.
Also, if your child has creditors, say, from a business transaction or from an automobile accident, you are in jeopardy of losing your home to the creditors. The child’s joint tenancy ownership in the property can be taken. An even bigger problem can occur if the child gets divorced. His or her joint tenancy interest may be considered marital property under state law and, as such, be subject to the whim of the judge in dividing the marital assets.
All these rules and results are the same whether the joint tenant is your child or anyone else other than your spouse.

Before my father died, he put all his property in joint tenancy with right of survivorship with my oldest brother, with whom my father was living. My father recently died. Soon after, my brother told me that he had “done more for Dad than the rest of us had” and that he was keeping all of Dad’s property instead of dividing it equally among the six children. Can my brother legally keep title to the property and not share it with the rest of us?
Probably so, unless you are willing to go to court and try to prove that your father didn’t intend this result. Part of the tragedy of joint ownership is this kind of unintended consequence. Even if your brother decides to share the property with the rest of you, there can be a gift tax if the value of each sibling’s share is more than the annual exclusion.