Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company1 Ownership Of Property Outright Ownership. Life Estate / Remainder. Tenancy in Common. Joint Tenancy with Right of Survivorship. Tenancy by the Entirety. Community Property. Trusts. Uniform Gifts to Minors Act (UGMA) and Uniform Transfers to Minors Act (UTMA).

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company2 Financial Planning and Ownership There are many forms of property ownership. Different forms are transferred and taxed in different ways. When collecting data, the financial planner must ascertain the ownership form for each asset.

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company3 Outright Ownership One who has ownership of property generally is free to do whatever he or she wants with it. –If the person borrowed money to purchase something and used the property as collateral, the lender generally has the right to recovery of any outstanding loan.

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company4 Life Estate / Remainder Outright ownership can be split into a life estate and a remainder. –A person with a life estate is generally free to use the property or income from the property for life. –The person with the remainder interest receives the property when the person with the life estate dies.

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company5 Tenancy in Common A tenancy is common is a form of co-ownership of property. –Tenants in common own an undivided right to possess property. –Each tenant is generally free to transfer their interest in the property as he or she wishes.

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company6 Joint Tenancy with Right of Survivorship Joint tenants have an undivided right to the enjoyment of property. When a joint tenant dies, that person’s interest in the property passes to the remaining joint tenant or join tenants. While a joint tenant is alive, a joint tenant can generally sever the joint tenancy or transfer his or her interest to another.

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company7 Tenancy by the Entirety Joint tenancy with rights of survivorship between spouses is called a tenancy by the entirety (in some states). When one spouse dies, the jointly owned property passes to the surviving spouse. While both spouses are alive and married to each other, one spouse cannot terminate a tenancy by the entirety without the consent of the other spouse.

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company8 Community Property Ten states (Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) have a form of ownership between spouses called community property. Each spouse owns a one-half interest in property acquired while the spouses are married. Each spouse is generally free to transfer his or her one- half interest in the property at death as he or she wishes. While both spouses are alive and married to each other, one spouse cannot dispose of the community property without the consent of the other spouse.

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company9 Community Property (cont) Community property generally remains community property even when the spouses move to a non- community property state. Certain property is non-community property even if a couple live in a community property state. –Property acquired by a couple prior to moving to a community property state would generally remain non-community property. –Property acquired individually by one spouse by gift or inheritance during marriage. –Property acquired prior to marriage remains separate property of that spouse.

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company10 Trusts Trust – Fiduciary relationship in which property is held by one (or more) person(s) for the benefit of one (or more) person(s). The person creating the trust is generally called a settlor, trustor, or grantor. The person who will be responsible for administering the terms of the trust is called a trustee. The grantor typically executes a trust document and transfers property to the trustee. The person for whose benefit the trustee administers the trust is called a beneficiary.

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company11 Trusts (cont) The property held in trust is often called the trust corpus or res. State law controls the creation, operation, and termination of a trust. Common law is generally controlling except to the extent that a state has enacted a statute dealing with a particular aspect of trusts. Trusts may generally have any terms except to the extent that a term is illegal or against public policy.

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company12 Trusts (cont) The law of any state with which the trust has contact with could apply –The state where the grantor resided upon creation of the trust. –Where the trustee is located or resides. –Where trust property is located (especially with regard to real estate). –Or where the beneficiaries reside. The grantor may specify in the trust document the state whose laws are to be applied to the operation and termination of the trust.

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company13 Trusts (cont) A Trust may provide: –Management of property. –Accumulation or distributions of income to beneficiaries. –Distributions of trust corpus to beneficiaries. –Other powers of appointment. Testamentary Trusts – Trusts arising at death are subject to probate at the grantor’s death Inter Vivos Trusts – Trusts created during lifetime are generally not subject to probate.

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company14 Trusts created during lifetime are either revocable or irrevocable A trust created at death is irrevocable. A revocable trust is a trust in which the grantor retains the right to revoke the trust. –Property in the trust would be returned to the grantor. A revocable trust is taxable to the grantor for income tax purposes. Trusts (cont)

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company15 The grantor is not treated as making a gift upon transfer of property to a revocable trust –A revocable trust is includable in the grantor’s estate at death. The grantor of an irrevocable trust generally makes a gift upon transfer of property to an irrevocable trust. Whether the grantor is taxable upon trust income or whether the irrevocable trust is includable in the grantor’s estate generally depends on what interests the grantor has in the irrevocable trust. Trusts (cont)

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company16 Uniform Gifts to Minors Act and Uniform Transfers to Minors Act The Uniform Gifts to Minors Act (UGMA) and the Uniform Transfers to Minors Act (UTMA) provide a way for gifts to be made to children in custodianship. Under either UGMA or UTMA, property is transferred to a custodian who holds the property for the minor. A custodian can be an: –Adult individual. –Custodial entity such as a bank or trust company. A separate custodial account must be created for each child.

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company17 The minor acquires immediate title to the property held by the custodian. The custodian controls the property until the age that the minor becomes an adult. –The custodian can use the custodial property for the use and benefit of the minor, in the custodian’s discretion. When the minor reaches the age of majority, the property is distributed to the child. –Some states permit the extension of custodianship after the age of majority is reached. Uniform Gifts to Minors Act and Uniform Transfers to Minors Act (cont)

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company18 If the child dies, the custodial property passes to the child’s estate. A gift under UTMA or UGMA can avoid certain problems associated with outright gifts to children. –A minor who owns property outright is free to do whatever the minor wants with the property, including possibly squandering the property. –People are often hesitant to deal with a minor, because a minor can generally disaffirm contracts while still a minor. –Custodianship avoids these problems. Uniform Gifts to Minors Act and Uniform Transfers to Minors Act (cont)

Ownership of Property Chapter 23 Tools & Techniques of Financial Planning Copyright 2009, The National Underwriter Company19 A gift under UTMA or UGMA can also be used instead of a gift in trust for the minor. –The custodianship avoids the expenses of a trust. –A trust for a minor may be indicated where there is an intent to make a series of gifts to the minor or the amount to be transferred is substantial. Uniform Gifts to Minors Act and Uniform Transfers to Minors Act (cont)