How one holds title to their assets will determine the process by which those assets will be administered; whether by contract, operation of law, court action (probate), or privately via trust instructions. It will also determine who will inherit the property whether it is the person they intended or a default person entitled to receive the asset under state law. The following is a guide to different types of titling and the various estate planning related ramifications of holding title in that manner.
Joint Tenancy – form of ownership of real or personal property by two or more persons in which each owns an undivided interest in the whole property and an equal right to its use during his or her life (w/Right of survivorship – upon the death of one joint tenant the entire property automatically passes to the remaining joint tenant)
Advantages - avoids a formal probate
Makes it very difficult for one joint tenant to act without the consent and signature of the other joint tenant (especially when a disability occurs).
The entire property is subjected to the creditors/judgments against any of the joint tenants,
The property is not subject to a “full" step-up in basis (only a “half") for capital gains tax purposes after death of the joint tenant.
Example: Mother and son hold title to a house as joint tenants. Mother put son on title in order to avoid probate at her death. If son gets involved in a lawsuit, the house is subject to the claim. If mother becomes incapacitated, this may cause problems for son if he has to sell the home to pay for her care. Finally, when mother passes away, only half of the property will be exempt from capital gains taxes when son goes to sell the property. If son had inherited the property from mother in another form, the entire property would receive a “step-up" in basis and would not be subject to capital gains taxes.
Tenancy in Common – form of ownership where each tenant holds an undivided interest in the property. Unlike a joint tenancy the interest of a tenant in common does not terminate upon his or her prior death (no right of survivorship).
Disadvantage - when a tenant in common passes away, their interest in the property would be subject to probate proceedings.
Community Property – property owned in common by husband and wife each having an undivided one-half interest by reason of their marital status. When one spouse passes away the surviving spouse will likely inherit the property pursuant to community property laws
Advantage – property gets a “full" step-up in basis for capital gains tax purposes
Disadvantage – surviving spouse must file a Spousal Property Petition with the court to have rights to the entire property
Community Property w/Right of survivorship – same as community property above except upon the death of one spouse the entire property automatically transfers to the surviving spouse
Advantage – property does get a “full" step-up in basis for capital gains tax purposes after the death of the first spouse and no need to petition the court for ownership rights
Disadvantage– if both parties pass away at the same time, the property must be administered through probate
Property held in a Business Entity – property owned by a C-Corp, S-Corp, LLC, Family Limited Partnership, etc.
Advantage – can provide protection of personal assets from claims arising from litigation in the course of running a business
Disadvantage – the ownership interests (shares or stock) may be subject to probate if not transferred into a living trust
Property Held in a Family (Revocable Living) Trust – form of title where the family trust owns the property while the trustees retain complete control over the asset
Advantages – avoids probate, no adverse tax consequences, instructions are easily changeable at any time, allows the trustees to control distribution of the assets after death.
For estate planning purposes, it is most advantageous to hold title in a revocable family trust. This allows for control over the assets, private administration, and significant income and estate tax advantages.