Types of Property Interests Finance 553 Types of Property Interests

Types of Property Interests Real Estate Land Permanently Attached to Land Fixtures Tangible Property – physical characteristics determine value of property Intangible Property – physical characteristics do not impact value, only rights to cash flow

Types of Property Interests How is property held in title Who has use of property How long does one have use of property Can one transfer title of property Without regard to others with interest With agreement of others with interest What are the issues with transfer in terms of Timing Taxes What are the issues, concerns, or potential problems for a financial planner?

Types of Property Interests Sole Ownership – Fee Simple Ability to use, consume, dispose, or transfer is the exclusive right of the owner Property is valued at fair market value for estate purposes FACTS: One owner No automatic survivorship right Included in probate (transfer of property via court after death of owner) Real Property If in state of residency, part of probate If in state other than residency, subject to ancillary probate

Types of Property Interests Fee Simple – Example John owns a house under fee simple… He can sell it at anytime He can transfer it at anytime to another Upon death is part of estate and subject to will (if specifically mentioned) or state inheritance rules if not in will If John is married, does wife automatically get the house? If John has children, do they automatically qualify for ownership or part ownership of the house? Can John use the property for any purpose he so chooses? What are the issues, concerns, or potential problems for a financial planner?

Types of Property Interests Tenancy in Common Two or more individuals own the property Each has an undivided share in the property Interests are not required to be equal Most common form of “dual” ownership for non-spouse parties Property interest owned outright, that is, property can be transferred to a third party without consent of other owner(s) Co-owners not responsible for debts of other interests FACTS At least two distinct owners No automatic survivorship feature Interest included in estate at fair market value Property can be severed if all interests agree or by court decree

Types of Property Interests Tenancy in Common – Example Alvin, Simon and Theodore own a commercial building Original price of building $500,000 Alvin paid $250,000, Simon paid $175,000 and Theodore $75,000 Interests (shares) are, Alvin 40%, Simon 35%, Theodore 25% Current fair market value $800,000 Is there a gift in the acquisition? Simon falls into financial difficulty… Can he sell his interest? Does he need Alvin and Theodore to agree to new interest? Theodore passes and via his will, passes ownership interest to daughter What is the estate value of the property passed to daughter What is the current value for Simon and Alvin Theodore’s daughter does not want the interest, what are her options?

Types of Property Interests Joint Tenancy with Rights of Survivorship (JTWROS) Two or more individuals own the property Each has an undivided share in the property Interests are not required to be equal At death of first joint tenant property passes automatically to surviving interests Property interest owned outright, that is, property can be transferred to a third party without consent of other owner(s) Co-owners may be liable for debts of other joint tenants (creditor may claim and receive entire property to settle outstanding debt) FACTS At least two distinct owners Automatic survivorship feature Interest included in estate at fair market value

Types of Property Interests Joint Tenancy with Rights of Survivorship – Example Florence, Mary, Diana, and Betty own a lake-side vacation home in JTWROS Original price of vacation home $1,200,000 Each paid $300,000 Interests (shares) are equal 25% each Current fair market value $2,700,000 Betty sells her interest to Barbara – what are the implications? Barbara decides to sell but the three remaining buy the interest At this time fair market value is $3,500,000 How much is the cost to each if they want to retain equal shares? Diana wants out completely – what are her options?

Types of Property Interests Tenancy by the Entirety FACTS Ownership of property by a married couple Ownership cannot be severed without consent of the other tenant Automatic survivorship to remaining spouse at death Couple can change ownership structure Usually to Tenancy in Common where individual interests are determined for the property No gift tax triggered at change Community Property States vs. Common Law States Couples have equal undivided interests in all property acquired during the marriage other than inheritance Commingled property usually becomes community property

Types of Property Interests Tenancy by the Entirety – Example Sonny and Cher are a legally married couple in a community property state After the marriage they acquire a house, cars, personal property worth $3,000,000 Cher inherits a stock portfolio worth $200,000 Sonny buys a record label for $600,000 during the marriage with funds from his income Cher wants to sell the stock and buy a new car, does she need Sonny’s approval? Sonny and Cher break-up (and elect to divorce) What is included in the estate of Sonny? Value of Estate? What is included in the estate of Cher? Value of Estate?

Types of Property Interests More on Community Property , Joint Ownership with Spouse The basis of the law comes from Spain and is civil law in the following states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Wisconsin Alaska allows individuals to enter into community property arrangements for in-state assets Community Property does not usually carry rights of survivorship Property can be divided interests when one spouse dies California and Texas have rights of survivorship options Common Law issues from common law states Moving from community property – spouse may gift tax free Moving to community property – all new acquisitions are community

Types of Property Interests Partial Ownership Interests Life Estate - Separate from Tenancy in Common Party has rights for a limited period – Life Tenant Rights to income or use of property while alive Transfers to remaining beneficiary (remainderman) Rights generally excluded from estate of Life tenant Usufruct – Louisiana form of Life Estate Term Interest Party has rights to income or use of property for a defined period of time At end of period property interests are transferred to remainderman Legal vs. Equitable Ownership

Types of Property Interests Partial Ownership Interests – Example Bill owns a home but grants Bobby partial ownership interest that allows Bobby to live in the home until his death The home is fee simple titled to Bill The home’s current fair market value is $450,000 Bobby currently lives in the home with a partial ownership interest Bill decides he wants to sell the property Can he unilaterally terminate the partial ownership interest, sell the property and force Bobby to move out? Can he sell the property with the partial ownership interest in tact? Bill passes away, what happens to the property? Bobby passes away and his son is living in the property with Bobby – does the son have any rights to stay in the home?

Types of Property Interests Usufruct (In Louisiana) Life Interest -- but with different terminology Usufruct interest is the partial interest Naked owners are the remaindermen Usufruct can terminate at death or remarriage Spouse has right to “house” while alive and terminates at death Spouse has right to “house” while single and terminates at remarriage Term Interest Partial interest is defined for a specific and definite period Can be for property use or income Legal vs Equitable Ownership – equitable ownership only provides rights to use or enjoy economic benefits

Types of Property Interests Summary of Ownership Interests Types: Fee Simple Tenancy in Common Joint Tenancy with Rights of Survivorship (JTWROS) Tenancy by Entirety (Married Couple) Partial Ownership Interest Community Property States Property acquired after marriage Tenancy in Entirety without regards to contribution Inheried property outside community property unless co-mingled.

Types of Property Interests What are the implications for Financial Planning? Assets need to be clearly titled prior to making wills, trusts, etc. In a marriage, state of residency at time of acquisition may be important For wills, property transfer requests must be consistent with ownership interests Transferring property into a trust must meet legal requirements to transfer assets based on ownership rights Untitled property may be listed in wills or trusts but all parties to the document (will or trust) must agree Other issues?