A lot of focus is placed on acquiring assets and security by advancing your career and making wise financial investments. However, what is often overlooked is how these assets are titled and the effect on your financial situation.
Unforeseen complications can arise when you have properties and assets titled in ways that create conflict within a family (who gets what or how much) or supersede provisions you make in your will. Also, significant tax benefits can be gained – or lost – depending on the characterization of your property.
In order to avoid complication, it’s prudent to be familiar with the different classifications of ownership.
Forms of Property Ownership
1. Sole Ownership
Sole ownership occurs when a single person owns a complete interest in a property or asset. Ownership is conveyed from one person to another through transfer documents, or by the laws of intestate succession. If the owner passes away, his or her interest in the property or the asset is included in the estate. Estate taxes and probate fees could diminish the value of that property if no other planning has taken place.
One positive is that the beneficiary of the property receives a full step-up in basis value. This means there will be no capital gain to worry about if the heir sells the asset because the heir receives the property at current market value.
For example, if a child inherits his or her parents’ home when the current market value is $500,000, that child’s tax basis in the property will be $500,000, even if the parents’ basis was only $250,000 (meaning that the house was bought for $250,000). In this way, the child avoids capital gains of $250,000 if he or she sells. That said, the current market value of the home is included in the value of the deceased’s estate.
2. Joint Tenancy
Joint tenancy is when two or more persons share equal, undivided interests in property. Joint tenancy is not limited to spouses – anyone can share joint interests, but there is a tax benefit when this arrangement is shared only between husband and wife (qualified joint tenancy). When an asset is owned by spouses, the value of the deceased spouse’s property passes to the surviving spouse with no probate and no tax consequences. This is similar to the process of joint tenancy with rights of survivorship (JTWROS).
A joint property interest cannot be passed through traditional documents, such as a trust or a will. If one owner dies, then the ownership interest passes directly to the surviving owner.
However, when the owners are not married, the entire value of the property is included in the deceased’s estate. In addition, the property must go through the probate process. This can catch people off guard, and underscores why you need to learn about the different forms of ownership.
It is intuitive to think that only the deceased’s share of the assets would be included in the estate, but this is not the case if the asset is held in joint tenancy. As a result, other ownership forms must be utilized to minimize taxes and avoid probate. If you are not married to the person with whom you are planning to share joint ownership of an asset, then joint tenancy is likely not the best type of ownership for the assets.