“Something in human nature makes us resent the impact of new ideas”



HOW DO YOU OWN IT?                           


The arrangement of property is a key aspect of estate planning.  As a planner, one should be familiar with the tax and non tax advantages of titling property in various ways.  Once a plan's instruments are drafted, appropriate transfers are made and gift or sales are implemented.  Planning centers around property rights and the planner must be familiar with acquiring and transferring title to property and the rights and obligations that follow property.


Before beginning the study of property one must keep in mind the definition of property.  Property is anything capable of being owned.  Property includes:


A.    Material objects held in outright ownership.

B.    Rights to possess, enjoy, use or transfer something.


There are two classes of property:


1.   Real property:  Land and all that is permanently attached to the land (includes house, garage, trees, shrubs, and growing crop); it does not include mobile homes.


2.   Personal property:  All property that is not real property.  There are two types of personal property:


A. Tangible:  Can be touched, felt, seen (e.g., cars, furniture, and cloths).  Represents the property and has intrinsic value.


B. Intangible:  Has no intrinsic value but represents something of value (e.g., bonds, mortgages, and stock certificates.)  Includes everything that is not tangible.


The planner must keep in mind that most individuals will not know how they own particular property.  One of the major problems confronting estate planners is that people frequently buy and sell assets without the foggiest idea of how those assets should properly be held.

Not understanding how property should be owned makes estate planning a frustrating and impossible exercise.  One cannot plan for property that they do not own, and if for some reason, one does attempt to do some planning with what they do not own, the attempt will  obviously be to no avail.





There are two general methods of owning property with four types of  joint ownership.




The easiest type of ownership to understand is property that is owned in full and outright ownership by one person and is commonly known as fee simple ownership.


The fee simple owner is a sole and absolute owner.  An outright owner may freely sell or exchange the property without the consent of any other person.  He/she is also entitled to all income from the property, and all gain upon the disposition of the property.  Interest in the property belongs to an individual, and to that individual’s designated heirs forever.  This includes most individually owned property.



Eve is a Widow and is the sole owner of a large Colonial type house in Baltimore.  Eve has a legal and witnessed Will, which in part states that her house should go to her oldest son, Edward.  Upon Eve’s death, Ed inherits the house, which he allows a younger brother, Sam,  to use as a residence as Ed has a large house of his own.  Ed is killed in an auto accident, leaving a wife and daughter.  According to Ed’s Will, his mother’s house is willed to his wife.  Ed’s widow decides to sell the house but Sam insists that he should get the house.  Ed’s widow would prevail and she can do whatever she wants with the house.



There are four types of joint ownership:


1.     Joint tenancy with right of survivorship


2.     Tenancy by the entirety


3.     Tenancy in common


4.     Community property




This is the most common form of co-ownership.  Two or more people who are not necessarily related own property in common.  The tenant's share cannot be transferred by Will. 


At a joint tenant's death, that tenant's share goes to the surviving tenants.  There are four basic characteristics of joint tenancies:


  • When a joint tenancy is created, the tenant contributing more than the proportionate share of the personal funds to buy the property, has basically made a gift to the other joint tenants.


  • Each tenant may sell their interests in the property during their lifetime, without the consent of the other tenants.  The new owner becomes a tenant-in-common with the other joint tenants.


  • If the property cannot be divided and a joint tenant wants to sell their interests, the property must be sold and the proceeds  divided among the tenants.


  • At the death of all the other joint tenants, the last surviving tenant has all rights in the property and can dispose of the property as they wishes. 


Legal relationship between joint tenants pertaining to:


  • Bank Accounts: Interests in bank accounts should be reported by each tenant proportionately to the amount the tenant put in the account.  Also, if the account creates immediate vesting, each joint tenant is entitled to an equal share of the balance and is taxed on an equal share of the interest.  A gift is made when the other joint tenant removes funds in excess of their own contribution.


  • Saving Bonds: A gift is made when a joint tenant redeems the bond and keeps a bigger share of the proceeds than the tenant who put up money to buy the bond (gift is from the other joint tenants).


  • Safety Deposit Box:  Contents remain the property of the depositing tenant.


  • Securities.  If securities are registered in the names of the co-owners as joint tenants a gift is made from the contributing joint tenants when securities are added to the account.  If securities are registered in street names, a gift occurs only when one of the joint tenants withdraws more than their proportionate share of the account.


A planner must remember that this method of taking title is greatly misunderstood by the public.  In fact, it is a form of ownership that is extremely confusing.



Seven Springs Real Estate Development is owned by Joe, Bill, Henry, Art and Frank, in Joint Tenancy.  Each of the owners owns 20% of the firm, i.e. all of the owners collectively own the entire firm.

Joe dies and his Will leaves all of his assets to his son Phillip.  Even though the Will is legal and witnessed, Joe’s ownership of the Seven Springs company passed to the remaining four owners in equal shares.  Therefore, the firm is now owned by the four surviving owners, and each survivor now has 25% of the firm.


Joint ownership is a fictional form of ownership created by our English common-law heritage.  Fictional in that, yes, two or more people can own the whole thing.  What occurs to breathe realism into this fictional method of owning property is the added survivorship feature.


This method of ownership is correctly called “Joint tenancy with right of survivorship.”  The survivorship feature means that as each individual joint tenant dies, that person simply falls off the ownership charts.  Upon death, title is in the hands of the surviving tenants.  Each of the survivors now owns a much greater percentage of the property.  Specifically, if there were three tenants and one died, the remaining two would own the asset.  It is almost as if the deceased tenant never really owned it in the first place. 


Joint tenancy with right of survivorship is an automatic method of planning property because this method of taking title functions as a mini estate plan.  It automatically passes ownership by law to the surviving tenants.  Please realize that there is no reason for individuals to plan their jointly held interest in there Will or trust.  As long as there is a joint tenant that survives, the passage of the asset is already planned.




Similar to joint tenancy with right of survivorship, but limited to co-ownership of property by a husband and wife.  Three basic characteristics are associated with this form of joint ownership:


1.     Tenancy is automatically terminated by divorce.


2.     Neither tenant can sell the interest without the consent of the other tenant.


3.     Property automatically passes to the survivorship co-tenant when one of the tenants dies.


Keep in mind that while both spouses are alive, each is a 50% owner.  In a tenancy by the entirety, neither spouse can convey his/her interest in the property without the consent of the other spouse (with joint tenancy with right of survivorship, joint tenants do not require such consent.)


Advantages of joint tenancy with right of survivorship and tenancy by the entirety:


  • Property cannot be reached by one of the tenants creditors.


  • Convenient (e.g., use of a joint checking account).


  • No Probate delays at death.


  • May be exempt from state death taxes (this will depend on State Law).


  • Privacy:  Passing of property at death is not subject to public scrutiny.  Property passes to survivor by operation of law.


  • Security for tenants. 


There are five disadvantages of joint tenancy with right of survivorship and tenancy by the entirety:


  • Possible gift tax.


  • Possible double federal estate taxation.


  • Loss of control by a decedent tenant that is once property is titled jointly the decedent’s Will/trust cannot affect the title to the property.


  • Liquidity problem for decedent's estate.


  • Property owned as joint tenancy with right of survivorship can be reached by creditors of individual surviving tenant.




Tenancy in common is co-ownership in which two or more individuals who are not necessarily related own property in common.  Each tenant's share is an undivided interest in the property;  shares may be unequal.  There are seven characteristics of this form of ownership:


  • Each tenant may dispose of his/her shares (through sale/gift/  Will as the tenant wishes), without the knowledge or consent of the other tenants (no survivorship rights for other tenants.


  • Co-tenant is treated as a separate owner of co-tenant's share of the property for tax purposes.


  • Each tenant is entitled to tenant's proportionate share of income, and each tenant must pay proportionate share of maintenance/operation expense.


  • When a co-tenant sells or gives interest in a property to others, the gain or loss may be realized on the transaction.  The new owner becomes a tenant-in-common with the other co-tenants.


  • If the property cannot be divided and a tenant wants to sell his/her interest, the entire property can be sold and the sale proceeds distributed proportionally among the co-tenants.



  • When an interest in tenancy-in-common property is disposed of, new owner becomes “tenant-in-common.”


  • Tenant in common's interest is freely alienable, descendable  and devisable.


There is no limit to the number of tenants who can own something with others in tenancy in common.  The only real problem occasioned by tenancy in common would be if one of the tenants wants to sell his/her interest.  If the buyer wants to know what it is he/she is purchasing, the selling tenant in common would not know the precise share of what is being sold.  All the seller would know is the percentage of what is being sold.


All in all, tenancy in common is a frequently used method of owning property.  The important thing to understand about this method of owning property is that if one is a tenant in common, he/she will absolutely own their percentage share in the property.  The percentage share can be sold or given away during lifetime and can be left to chosen beneficiaries at death. 


A potential drawback of this form of ownership is that if the other tenants do not particularly like the person to whom the deceased tenant has left the percentage share in the property; they can do nothing about it.  This is commonly called "Breaks of the Game.”  If an individual chooses this form of ownership, that person's co-owners and beneficiaries may face co-owners they do not like.




People who live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Puerto Rico, Texas, Washington or Wisconsin, must be aware of how community property is treated for estate planning purposes.  Even if one lives elsewhere, you need to understand these laws.  The reason is that property generally retains its original ownership identity throughout the life of the owner  (regardless of whether the owner moves).  In other words, community property will retain its character if the owner moves to a non-communal property state.


One must keep in mind that separate property owned by either spouse prior to marriage;  gifts;  inheritances and property acquired with individual funds before marriage are considered non community property.  However for any property acquired during marriage, both husband and wife each own a one-half interest.  It is assumed that property acquired during marriage is the product of the effort and consideration of both spouses, regardless of the employment status or actual contribution of either at death.  Neither spouse can pass on more than one half the community property by Will. 


If a couple moves from a community property state to a common-law state, the community property remains community property (unless the spouses mutually adjust rights).  If on the other hand, a couple moves from a common-law state to a community property state, the property brought with the couple retains its original character.  There are two important exceptions to the community property laws:


  • Property received by one spouse or the other after marriage as a gift or inheritance remains separate property.  It does not become community property.


  • Property acquired prior to marriage by either party also remains separate property.


There are two additional considerations to be made when discussing property rights:



(Contracts  between intended spouses governing property interests).  The prospective groom may transfer property to the intended bride in exchange for promise to marry. 


A Prospective bride may give up certain rights the bride would have in her intended husband's estate in exchange for a specific property settlement.  (These are legally enforceable contracts as the consideration is the promise of something of value in exchange for relinquishing some marital rights).



This is a property settlement between a divorcing husband and wife in which either release any interest held in the other's estate.


At the completion of this section on property ownership, there are a number of factors and definitions affecting property ownership that the planner must keep in mind.


1.  SITUS: 

Refers to the place where property is located or kept.  All real property and tangible personal property are subject to the tax laws of the jurisdiction in which property is located.


Permanent residence.  When a person dies, the estate is Probated (distributed) and taxed under the laws of the state in which the person was domiciled.  Property may be taxed by the state of domicile, the state of location or both.



A person may have several residences and only one domicile.  Actions that establish domicile would be:


A. Bank accounts/safe deposit boxes.


B. Residing at present location for more than half of the year.


C. Automobile registration.


D. Voter registration.


E.  Establishing membership in social clubs/religious organizations.


F.   Situs of principal residence.




  • Real Estate:  Taxed by state where property is located, regardless of decedent's domicile.


  • Tangible Personal Property:  Taxed by state where property is kept, and  may also be taxed by the state of domicile.


  • Intangible Personal Property:  Taxed by the state of domicile, regardless of where the property is located.


  • Multiple Taxation: The Supreme Court has ruled that more than one state may have an interest in an individual's property.




Fred Flintstone was domiciled in Florida.  Fred also owned real property in North Carolina, tangible personal property in Vermont and intangible personal property located in Utah.  At Fred's death, his state of domicile, Florida, would have a right to tax all of his property except the real property located in North Carolina.  Since real estate is always taxed in the state in which the property is located, North Carolina has the right to tax real estate located there.  Fred's tangible personal property may be taxed by the state where taxable situs exists (Vermont).  The intangible personal property is subject to tax by the state of domicile, Florida.  Utah may also tax his intangible personal property as a non resident form of taxation.




The following is a short summary of ownership characteristics:



FEE SIMPLE                      TENANCY IN COMMON


You own all of it.                  You own part of it.


You can:                                You can:


Give it away.                         Give your part away.

Sell it.                                    Sell your part.

Leave it on death.                  Leave your part on death.





You own an interest with someone else;


But you can:


Give your interest away.

Sell your interest.

You cannot leave your interest on death.






One of the most serious estate planning decisions that a person makes, actually may be given little thought.  As a new property owner takes ownership of Real Estate, seldom do they pay any attention as to the particular way that they take title to the Real Estate and many, if not most, people don’t even realize that they have a choice.  This decision is often made in relationship to the most precious and personal piece of real estate – the family home.  Therefore, even though it may be repetitious in some areas, it is of enough importance that Real Estate Deeds used in estate planning should be discussed as a separate section in this text.


An individual has a choice of how to take title to property, and the form of ownership can be changed at any time (if all owners agree to the change). 


The use of the word “Tenant” normally refers to a renter of property, however in reference to a form of ownership, “Tenancy” should be considered as a form of ownership.



The most common method of ownership in real estate for a single person, but married people can also own property in this fashion.  However, a married person owning property in “Severalty” does not keep assets our of a divorce settlement.  The laws as to divorce and death in sold ownership are difference in common law states and community property states.  Therefore, an attorney should be consulted if a married person is considering title in Severalty.



This form of property ownership is used when property is owned by two or more people who may, or may not, be related.  This type of Deed merely means that the survivor owns the property.  If four persons own property as Joint Tenants with Right of Survivorship, and one of them dies, the property is then held by the three owners still living.  At the death of another owner, it is now owned by two persons.  Property under such a deed does not pass by the Will of the decedent, but passes by the power of the deed.



This is discussed elsewhere in this text.  This type of deed is the same as with Joint Tenancy, except it can be held ONLY by husband and wife.



Two or more people own a particular piece of real estate by owning an undivided half of the property.  As an example, if two people own a Section of land (640 acres), each of the owners own an undivided half of the land, and not a particular 320 acres.  The undivided half passes by each person’s Will and if there is no Will, that ownership interest passes by the state’s laws of intestacy.



Pearl and Etta are twin sisters.  Their parents had left them with a sizeable piece of Real Estate.  The property was left to them “together.”  Technically, they owned the land as Tenants in Common, meaning that each owns an undivided half of the property without any stipulation as to anyone owning a specified half of the property.  Their ownership is “undivided.”

While the twins got along great, neither got along well with the other’s children.  Presently, if one of the sisters died, the surviving sister would be partners with the other’s 3 children, and they simply do not want that to happen.

The ownership of the property could be changed to “Joint, with Right of Survivorship” which would leave the survivor with 100% ownership of the property.

They could give each other the “Right to Purchase” the deceased party’s interest and fund it with life insurance.

In addition, there are several Trusts that could be used.  (Trusts are discussed in detail later in this text)



A Life Estate means that a person owns his/her interest in the real estate only as long as he/she lives.  For instance, the title to a house could read:  “The property at 123 Main Street is being held as a Life Estate by me.  At my death my daughter, Hanna, will hold this property as a Life Estate.  At her death, her daughter, Anna, will receive this property outright.”



A partnership can own real estate and each partner would enjoy some benefit of ownership.  This is an excellent means of ownership for a family that wants to progressively, give the younger generations more ownership.

Note:  To leave the property to a Charity, the deed could state “I have a life estate in the property at 23 Main Street and at my death, ownership will pass to St. James Methodist Church outright.”



A life estate deed can be used to pass property specifically without using a Will.  (A Will can be used if you want a trust to be the Remainderman).  A Life Estate deed can be used to fulfill the wishes of the property owners to have real estate go to a daughter and to her son, but not to the owner’s son-in-law.  This could be accomplished by (1) the owner retaining a life estate, (2) give the daughter a consecutive life estate, and (3) make the grandson a remainderman.  This way the owner would own it as long as he/she lived, then the daughter would own it as long as she lives, and then the grandson would own the property outright.


Another common situation is for a couple who have been married previously, each having children by previous marriage.  If a substantial part of the estate was put into a house, the residence, the couple may choose to take title in a “Joint and Concurrent Life Estate” and name several children as remaindermen.  With the Joint and Concurrent Life Estate, the husband and wife are both owners at this time, with whichever spouses survives the other is the owner of the house for life.  Upon the death of the survivor, the property will be left to the designatee children.



In order to encourage charitable gifts, the tax law is very generous to a person who wishes to leave his/her home (or farm) to charity at his/her death.  If the owner makes an irrevocable transfer of his home or farm to charity at his/her death by means of a life estate deed, he/she receives an income tax deduction in the year that they make the irrevocable decision.



Donald is a widower and has no children.  He has an estate worth about $2 million, and the only living relative is a niece.  He would like to leave something for his Church at his death.

Donald has a home worth about $500,000, with no mortgage.  Donald could deed his home to the Church so that it would pass to the Church at his death. 

By doing so, Donald can live in the home for the rest of his life.  But when Donald dies, it will belong to the Church with no probate, no estate tax, and no complications.

In addition, Donald will get an income tax deduction of nearly $250,000 and although he cannot get it in one year, he can take it over the following five years. 




When dealing with forms of property and ownership rights keep in mind there are three basic forms of estate ownership with four other property interests.  It is important for the planner to understand the various interests in property and the manner in which they may be used in the planning process:



This section refers to ownership interests in real property.  The three main types of estates are:



 Interest in the property belongs to an individual, then to the designated heir forever.  This estate includes most individually owned property.



Refers to an individual who has an absolute right-to-possession (enjoyment) and profit from the property for the duration of life;  the individual's interest in the property ends at death.



If Eve’s Will gave her son Ed, the possession of her house at the time of her death, upon Eve’s death, Ed would own the house.  In addition, if Eve’s Will listed her son Sam as Beneficiary in case of Ed’s demise, then the house would pass to Sam upon Ed’s death, and not to Ed’s heirs.



Two components of this type of estate are:


(A) Can be measured by life tenant's life or someone else's life if another person's life has been designated as the measuring life;  (B) Owner of a life estate for his/her life has no interest in the property to transfer at death.



Interest in the property is for a set period of time only.


  • If tenant dies before the end of the term of years the right to possess the property for the rest of the term will be determined by Will or intestacy statutes.


  • Tenant does not have the right to transfer the property at the end of the term of property interest.


  • Leasehold is the most common example of an estate for a term of years.



In her will, Eve leaves her house to her son Ed for his exclusive use and enjoyment for five years after her death.  After Eve dies, Ed lives in the house for a period of 5 years.  At that time, the property would be passed to Elvira, Eve’s Granddaughter, and is so designated in her will. 






Interest in the property takes effect at a specified future time; before that time, the remainderman has no interest in the property.  It must take effect immediately upon expiration of another interest.


In the above Consumer Application, the person designated by Eve (Elvira) to take over the property after the 5 years, is the “remainderman” (even if the person is female).  They may have either Vested or Contingent interest in the property.


  • Vested interest:  The right to receive the property at a future time is fixed and absolute.


  • Contingent interest:  The right to receive the property may or may not come to effect at a future date, depending on the occurrence/non occurrence of a specific condition.



If Elvira's remainder interest in her mother's house was vested she would have absolute ownership of the house when Ed moved out after five years.  But suppose the Will had stipulated that Elvira was-to-get possession of the house only if she were married by the time Ed’s five years in the house were up?  This would be a contingent remainder interest for Elvira.  (Remember that a contingent property right may never come into existence;  if Elvira was still single when Sam's five year interest expired, Elvira would lose her right to the house).



 Property owner transfers property but reserves the right to have all or part of the property returned (like remainder interests, reversionary interests may be vested or contingent).



 Eve decides to move into an apartment and rent her house.  She gives her son Ed, the right to collect and keep the rents for the next 20 years.  When the 20 years are up, the rents will belong to Eve again.


Note:  Remainder and reversionary interests must be carefully structured to avoid the tax liability of incomplete transfers (i.e., the property transferred is taxed to the original grantor as if grantor were still in possession of the property).



Future interest always held by someone other than the original owner of the property (i.e., conferred rather than retained rights).  This was created to solve problems of old English Common Law, which stated that no gaps in property ownership could exist.





 Has legal title to the property;  the title is absolute with all related rights and duties.




 Entitled to all the benefits of the property (e.g., in a trust, the trustee is vested with legal title, but the income generated by the trust goes to others who have equitable title).




Historically, joint ownership has had some good attributes but basically, it is common but it can be quite complicated.  Joint tenancy is a convenient form of ownership.  It is a form of ownership that has been encouraged in the marketplace by financial institutions, by some merchants and by numerous professional advisors.


Joint ownership appears to be psychologically pleasing to people, particularly to married couples.  Its very name implies "the two of us", a partnership, a marriage of title as well as of love.  Joint ownership creates, because of its survivorship  feature, an instant mini-estate plan for joint owners.  Jointly held property requires no Will, trust, or other estate-planning device.  It does not go through Probate court on the death of the first joint tenant.  In fact, this has been one of the main selling points.  "If there is no Probate, owning property jointly has got to be good".  Jointly held property has been most attractive among close family members.  Unfortunately, perception is not reality!


Traditionally, however, there have been significant problems with this form of property ownership.


Jointly held property can pass property to the wrong folks, to the other joint tenant rather than chosen beneficiaries.  On the death of a joint tenant there is absolutely no question as to where that property interest is going.  It is going to the surviving owner by operation of law.  On death, a joint owner cannot control the way the property passes nor the time of its passage.  Death has its own timing.  Who outlives whom is an unknown, so are the results of owning property jointly. 



Marie, a widow with two adult children meets and marries a lonely widower Henry, with one adult child.  They combine their assets and title them jointly.  Two days later Marie dies.  Since this estate is now in joint ownership, the widower receives everything, the widow's children nothing.


Joint ownership only works if there is a surviving joint tenant.  If both property owners die at the same time most states have adopted the Uniform Simultaneous Death Act.  Under this law, joint property is distributed in proportion to the number of joint tenants.


Simultaneous Death and Joint Ownership just do not mix well.  Remember the survivorship feature.  If one owner outlives the other by one second, it all goes to the heirs of the one who survived by one second.  It is because of the survivorship problem that many critics allege that jointly owner property may go to unintended heirs.


Jointly owned property is generally beneficial to creditors of the owners.  Property taken in both names is generally sizable on the default or misdeed of either owner.  Either or each joint owner could lose ownership in the property, which is not good estate-creditor planning.  Joint ownership, as one might have concluded by now, is complicated; and Congress's ignorance in this area was not unique.


Another hurdle to clear with jointly held property is the federal estate tax.  Federal estate laws attempted to tax all the jointly held property in the estate of the first owner to die.  When the remaining tenant died, it was taxed all over again!  Joint property was generally taxed twice,   In other words, 200 per cent taxable.  Fortunately Congress came to its senses and enacted the Economic Recovery Act of 1981 (ERTA).


Today, spouses who are citizens of the U.S. can acquire property jointly without incurring a federal gift tax.  The law is absolutely clear on this point, and there are no limits to the amounts involved.  Regardless of which spouse's funds are used, no federal gift tax will result from U.S. citizen spouses taking property jointly.  The law states that unlimited tax free gifts are allowed between U.S. citizen spouses.  This unlimited gift rule between U.S. citizen spouses is referred to as an unlimited lifetime "Martial Deduction".  If the spouse receiving the gift is not a U.S. citizen, there is no unlimited lifetime martial deduction.  There is instead an exclusion from the gift tax of the first $100,000 in value of gifts to the non- U.S. citizen spouse.


With passage of ERTA, the Federal Government finally recognized husband and wife as one family unit.  For purposes of federal gift taxation, inter-spousal property transfers, when made to a U.S. citizen spouse, have no federal gift tax consequence.  The law has not materially changed with respect to owning property jointly with people other than with spouses.  The aware individual will continue to be wary and sensitive to potential federal and state gift-tax-traps when putting property in joint names.


ERTA also dramatically changed the federal estate tax rules with regard to jointly held property. (Supp.)  Under the law prior to ERTA, all joint property was taxed in the estate of the first joint owner to die.  This was always so unless it could be proven that the other owner contributed funds toward the property's acquisition.


As to spouses, ERTA drastically changed the law.  The estate of the first spouse to die will include only half the value of the jointly held property, rather than potentially all of it under the old law.  When the second spouse dies, the estate will be taxed on the value of the entire asset.  Jointly held property automatically belongs to the survivor tenant.  If it all belongs to the survivor, it will all be taxed in the survivors estate.  Spouses can leave everything they own, including property held jointly with spouses, to their spouses free of Federal Estate Tax.  Just remember: There is no federal estate tax on property held jointly with a spouse when the first spouse dies.


Great care and caution must be used in creating joint ownership with non-spouses.  Do not forget that the jointly owned property will always belong to the surviving owners.  Here your estate might have to pay tax on the value of your interest in the property even though the property is going to a non-family member on your death.  Remember that cabin owned jointly with your brother?  He will get the cabin if you die first, and your estate may pay the federal estate tax on half its value.


The law created another problem with property held jointly between spouses.  It has to do with after-death income tax planning and a concept called "Stepped-up Basis" Rules.  These rules state that upon the death of a taxpayer, property in the estate gets a new cost basis for income tax purposes.



Ellen dies with a small portfolio of stock.  She paid $1,000 for it several years ago.  Prior to her death, she could have sold the stock for $9,000.  At her death, the portfolio was valued at $10,000 for Federal Estate Tax purposes.  If her heirs sold it after her death for $10,000, there would be no income tax.

However, if Ellen had sold the stock just prior to her death, it would be subject to income tax.  Her cost basis in the stock would be increased (stepped-up) by operation of the law, from $1,000 to $10,000 – its date-of-death value.




In the above Application, if Ellen owned the stock jointly with her husband, when she died only half of the stock would be valued on a stepped-up basis.  If her husband sold the stock after her death for $10,000, he would have a $4,500 taxable gain.  His starting cost was $500 (half the $1,000 paid), so his half of the gain would be $5,000 (half of $10,000).  By subtracting the cost of $500 from the $5,000, he has a $4,500 gain.  He does not report any gain on Ellen’s behalf because her half of the portfolio received a stepped up basis of $5,000.


For illustrative purposes, contrast the tax problem of Ellen's spouse with this situation:



Ellen owns the stock in her name (not in joint names).  Ellen dies and leaves it to her spouse.  There would be no federal estate tax (spouses can leave everything tax-free to surviving spouses).  The entire value of the stock sets up a step-up basis to $10,000.  Ellen's spouse sells the stock the day after her death for $10,000.  There is no income taxable gain to Ellen's spouse.


Joint property does not get a 100% step-up basis for income tax purposes but rather only a 50% step-up because only 50% is included in the estate of the first spouse to die.  When the planning is for spouses, jointly owned property becomes unattractive in many cases.  For example, if the surviving spouse is not a U.S. citizen or if the property is not held between spouses, the step-up in basis generally will depend upon the amount each joint tenant contributed to obtain the property.


The planner must think "hard and long" before recommending the use of joint ownership to clients.  In spite of the many changes in our federal estate, gift and income tax laws, it would probably be advisable to emphasize that joint ownership is a potential planning pitfall that should be avoided in most instances.





A thumbnail sketch of advantages and disadvantages of joint ownership would be:




  • Easy and convenient.


  • Psychologically pleasing.


  • Mini-estate plan.


  • Not complicated on surface.


  • No gift tax to U.S. citizen spouse.


  • No death tax on the death of the first spouse, if the surviving spouse is a U.S. citizen.


  • Avoids Probate as title to assets held in joint tenancy pass automatically at the death of one joint tenant to the others.  There is no need for a formal Probate unless all the joint tenants die.


  • Convenience.  Bank accounts in joint tenancy can be withdrawn by any joint tenant.  This could be an advantage if one party becomes incompetent due to an accident.  a stroke, or advanced age.




  • Passes property to unintended heirs.


  • Affords no planning opportunities.


  • No control.  A Will or trust will have no effect on joint tenancy assets, even if the individuals changes their mind as to the persons they would like to receive their share when they die.  Also, the entire asset may be available to the creditors of either joint tenant.


  • Gift taxes to non-espousal owners or non-U.S. citizen spouses.


  • Loss of complete step-up basis.


  • Potential gift tax penalties.


  • Income tax penalty.  When appreciated assets are sold, an income tax is generally paid on the difference between the cost basis and the appreciated sales price. 




Holding Title refers to property owned by a husband or wife which is not community property;  generally property acquired by either, prior to marriage or by gift, Will, inheritance or money damages for personal injury, and all of the rents, issues and profits thereof.




Community Property is both real and personal property earned or accumulated after marriage through the efforts of either husband or wife living together in a community property state.  Deceased spouse's Will has control over one-half of community property.




Joint Tenancy is joint ownership of equal shares by two or more persons who hold undivided interests without right of survivorship.  Interests need not be equal and will pass under the terms of the owner's Will.




Severalty refers to ownership held by one person only.  Person can be a natural person or a "legal" person, such as a corporation.




Tenancy in Partnership is the method by which property is owned by a partnership.  Specific interest in the property cannot be conveyed by one partner alone.



Under the Uniform Gifts to Minors Act or  Uniform Transfers to Minors Act an adult person can hold title to property for the benefit of a minor.




The trustee of a Living or Testamentary Trust holds legal title to property for beneficiaries, who have equitable title.




A Life Estate is the use of ownership in real property which terminates upon death of the life tenant.


Note:  Advice as to how to hold title to specific assets is within the exclusive realm of the practice of law.  These laws may vary from state to state.




1. Property

A. is anything capable of being owned.

B. is not considered part of the estate planning.

C. refers to real estate only.


2. The simplest form of property ownership is

A. joint tenary.

B. community property.

C fee simple.

3. An agreement between divorcing husband and wife in which either releases any interest held is the other’s estate is called a

A. prenuptial agreement.

B. postnuptial agreements.

C. tenancy is common agreement.

4. For tax purposes, Sites refers to the state where

A. a Will is drawn.

B. property is located or kept.

C. intangible personal property is located.


5. What type of estate refers to an individual who has an absolute right-to-possession, as long as he/she lives?

A. Life Estate.

B. Term Life.

C. Tenant estate.


6. Remainder Interest

A. is where the property owner transfers ownership to the property but retains the right to have the property returned.

B. is the same as the interest of tenants in common with the right of survivorship.

C. in property takes effect at a specific future time.

7. An owner of fee simple property

A. has legal title to the property.

B. must have a recorded deed.

C. is the same as the equitable owner of property.

8. One of the disadvantages of joint tenancy with the right of survivorship is

A. it avoids probate.

B. title could pass to unintended heirs.

C. it creates an instant mini-estate.

9. When there is a gift of an estate for a term of years, who has the right to transfer the property at the end of the term?

A. The tenant.

B. The original property owner.

C. The donee.


10. Under the Economics Recovery Act of 1981 (ERTA), for purposes of federal gift taxation,

A. inter-spousal property transfers have no federal gift tax consequences.

B. U.S. citizen spouses can acquire property jointly, with less than $100,000 of total values, without incurring a federal gift tax.

C. U.S. citizen spouses and non U.S. citizen spouses are treated the same.



Answers to Chapter 3 Quiz: 1A, 2C, 3 B, 4B, 5A, 6C, 7A, 8B, 9B, 10A