Chapter 3: Property Interests

Property Right

anything capable of being owned

Real Property

land or anything permanently attached or affixed to it

Personal Property

all property other than land or an interest in land

- Tangible (anything touched seen and felt, e.g. jewelry,car)

- Intangible (object is representative of something else; the value of the intangible exceeds the physical object, e.g bond, stocks)

Fee Simple

- Holder has the right to sell, gift, or devise their interest without seeking anyone else's consent.

- Included in gross estate at FMV

- Eligible for marital deduction if left to spouse

- Gets step-up in basis at DOD

- Goes through probate

- Holder pays income taxes at holder's marginal tax rate

"To A and A's heirs."

Life Estate

Gives the owner the absolute right to possess, enjoy, or derive income from the property for the span of the measuring life (NOT forever)

- Life Tenant: Has a duty to not create waste for the remainderman (who takes after the life estate).

eg. Fails to pay property taxes, Fails to insure the property against foreseeable losses, Destruction of the property’s income-providing source

- Grantor creates a life estate for himself from solely owned real property or trust income, then he must include property's FMV in his gross estate. Where Grantor does not create a life estate for himself or retains a remainder interest then does not get included in his gross estate.

- "To A for Life"

- "To A for the Life of B"

- "To A for life, then to B"

Split Interest Gift

Gift is made to life estate holder (present interest) and can use annual exclusion; &

Gift is made to remainderman (future interest), but not exclusion can be used because it's a future interest gift. Remainderman receives full step up in basis of the property at life tenants death.

Estate for Term of Years

An interest in property established for a specific duration. Present interest gift (can subtract annual exclusion from gift).

Future Interests

A present right to possess or enjoy property in the future

- Remainder Interests

- Reversionary Interests

Remainder Interests

A present right (property interest) to future enjoyment of property. Must take effect immediately upon the expiration of another estate.

- Vested Remainder

- Contingent Remainder

Vested Remainder

- the right to receive the property in the future is absolute

- receiving the property is inevitable by the remainder person and cannot be taken away by anyone.

- Indefeasibly vested

- Presently vested property interest

Vested Remainder example

Testator: "To Don for life, then to Tom in fee simple."

- Don = Life Estate

- Tom = Indefeasibly Vested Remainder

Contingent Remainder

May or may not come into effect (possessory interest) at some future date, depending on the occurrence or nonoccurrence of an event or condition.

- Fee Simple Determinable

- Fee Simple Subject to a Condition Subsequent

- Fee Simple Subject to an Executive Limitation

Contingent Remainder example

Testator: "To Don for life, then to Tom only if Tom survives Don."

- Don = Life Estate

- Tom = Contingent Remainder (contingent upon surviving Don)

Reversionary Interests

is a future interest that remains with the grantor (original owner) when they transfer less than their full estate.

When the transferred interest ends, the property automatically goes back to the grantor

- Always vested.

- (Owner A has a Fee Simple -> Life Estate to B with no named remainderman).

Reversionary Interests example

Testator: "To Sara for life."

- Sara = Life Estate

- Testator's estate = Reversionary Interest

Legal Ownership

one holds legal or actual title and has the rights and obligations connected with the ownership.

e.g. A mother who takes title as custodian of a bank account established for her child's benefit under the Uniform Transfers to Minors Act has legal title, but the equitable/beneficial interest is owned by the child.

Equitable Ownership

is the economic right to enjoy the use of the property.

- Right to use and benefit from the property.

- Right to enjoy the property.

- Right to receive income from the property.

e.g. If a friend lends you her car while your car is in the shop, you have a beneficial interest in the car without having title.

Complete v Incomplete Transfers

- A transfer is complete and irrevocable when the transferor gives up all dominion and control over the property.

- The transferor cannot rescind, amend, reclaim, or change beneficiaries after the transfer.

- Once control is fully relinquished, the transfer is generally treated as a completed gift for gift and estate tax purposes.

Concurrent Ownership

Property can be owned entirely by one person. A person can also hold a portion of property in conjunction with others.

- Tenancy in Common

- Joint Tenancy with Right of Survivorship

- Tenancy by the Entirety

Tenancy in Common (TC)

Ownership between 2 or more related or unrelated parties. A separate but undivided interest in property shared between two or more individuals. All cotenants DO NOT have to have an equal share of the property.

- Property can be real or personal.

- % of interest can be sold or transferred. Possible to mortgage an interest in TC, but few lenders would do it.

- Generally need consent of other TC owners to do anything with the whole property.

- Force sale of whole property... could seek to partition instead.

- No right of survivorship.

- Included in the probate estate.

Tax Concerns of TC

Federal Estate Tax: FMV of an individual's interest is included in their gross estate, but if transferred to one's spouse then its FMV is eligible for the unlimited martial deduction.

Federal Gift Tax: If one tenant has received a greater proportionate interest than his contribution to the tenancy, a gift has been made from the cotenant at its creation. Also can occur when property is sold and a greater share of the proceeds are received than their contribution.

Federal Income Tax: Cotenant is treated as a separate owner of his share in the property. Each one is entitled to their share of any income generated. If a seller sells their interest, they realize a gain or loss. General Rule - Upon death of a taxpayer, property in the estate gets a new cost basis for income tax purposes.

“To A, B, and C as joint tenants each owning 1/3 share” 

Buying Out Other Owners

if one owner of a TC purchases all other owners interest in the TC -->

Purchaser takes property in fee simple absent other encumbrances.

Joint Tenancy with Right of Survivorship (JTWROS)

2 or more joint tenants who have an undivided equal ownership interest in the whole. Property can be real or personal and can be severed by one interest holder without the consent of the other cotenants.

- Property held in JT DOES NOT pass by will.

- Property is potentially siezable on the default or misdeeds of individual owners.

"To A and B as joint tenants with the right of survivorship, and not as tenants in common."

Tax Concerns of JTWROS

Federal Estate Tax: Full FMV of the property will be included in the last living joint tenant's gross estate. Prior joint tenants who die before must included their proportionate ownership in their estate.

Federal Gift Tax: If one joint tenant contributes more than his share to acquire jointly held property, that joint tenant has made a gift to the other joint tenants OR a gift is made to the other joint tenants where one pays more than his share of either mortgage payments, costs of maintenance, or other expenses for the operation of the property.

Federal Income Tax: If the property is not held between spouses, the step up in basis generally will depend upon the amount eat joint tenant contributed to obtain the property. Held between spouses DOES NOT get a 100% step-up, rather only a 50% step up because only 50% is included in the estate of the first spouse to die.

Actual Contribution Rule

Property is included in the decedent's gross estate to the extent of the decedent's original contribution percentage.

- Entire FMV of jointly held property is included in first JT to die's gross estate UNLESS can prove actual contribution from other owners or inherited/gifted.

Actual Contribution Rule Example

John purchased a piece of real estate and titled the property as a JT with his son Bubba. Bubba contributed no money to the purchase of the property. John has made a gift of 50% of the value of the property to Bubba.

When John dies, 100% of the value of the property will be included in John's Gross Estate because of the Actual Contribution Rule. If Bubba died first, Bubba would include 0% in his Gross Estate.

Joint Bank Accounts/Withdraw Rule

A gift will not be deemed to have been made at the create of a joint bank account.

Gift IS made when the donee-joint tenant makes a withdraw from the joint bank account until that time such gift is deemed to be revocable and incomplete.

Joint Bank Accounts/Withdraw Rule example

If Mrs. Robinson deposits money in a joint savings account that she opens in both her and her son's name, when has a gift been given?

She has not made a gift until her son withdraws some of the money for his own use. The donee-joint tenant must receive some benefit from the property before a completed gift is made.

Tenancy by the Entirety (TE)

property is only between spouses that cannot be partitioned without the consent of the other spouse.

- Property can be real or personal.

- At the death of the first spouse, the property automatically transfers to the surviving spouse outside of probate. CANNOT be reached by any one spouse's creditors, but can be by joint creditors.

- 50% of the FMV of the property is included in a decedent's gross estate for estate tax purposes and its value is eligible for the unlimited marital deduction regardless of the actual contribution rule.

Community Property

Each spouse owns undivided 1/2 interest in all property earned by the couple during the marriage while domiciled in a community property state, regardless of how it is titled. EXCLUDES property acquired by gift or inheritance.

- Property left to a surviving spouse gets a double step up in basis to FMV of decedent's DOD.

- Property acquired retains its character even if couple moves to a separate property state.

- Life insurance is community property regardless of whose name is listed as owner.

Community Property example

e.g. H and W live in a community property state. H works outside the home earning $100,000/year. W is at home raising the children. Using his earnings, H has purchased, in his name, a house, a car, and investments worth $80,000. Assuming that all of their property was acquired with H's earnings since the time of the marriage, W will be considered the owner of half of the house, car, and investments.

Separate Property/Common Law

Each spouse owns all that he or she earns or is titled in their individual name and has no ownership interest in the other spouse's earnings.

- Divorce -> equitable distribution of assets

- Protections for surviving spouses

- Elective share statuses

Separate Property/Common Law example

e.g. H and W live in a separate property state. H works outside the home earning $100,000/year. Using his earnings, H has purchased, in his name, a house, a car, and investments worth $80,000. H will be considered to be owner of all of the property titled in his name, regardless of his marital status at the time of the property's acquisition.

Community Property taxes

Estate Taxes: Decedent's half of community property and his separate property will be included in his gross estate regardless of how it is titled.

Income Taxes: Income earned by one spouse is treated as 1/2 being earned by each one. Income from separate assets is usually attributed to the spouse who owns the asset.

- Idaho, Louisiana, Texas, and Wisconsin view income earned from separate property as community income.

- Double step-up basis rule.

Quasi Community Property

Property acquired in a separate property state after marriage, regardless of whose name it is titled, if sold and another house is bought in a quasi community property state the new house is deemed community property, regardless of title.

- California, Idaho, Washington, Wisconsin, Arizona

Couples can Agree Otherwise

- Couples can agree what property is marital and what is separate regardless of the state.

- Such agreement usually must be in writing to overcome presumption of state law (e.g. prenuptial or other marital agreement should work).

Domicile

The place that individuals consider their permanent residence. Generally, where an estate is probated, distributed, and taxed unless there is property in other states. Intangible personal property is generally taxed by the state of domicile.

Multiple Taxation

More than one state can tax the same property. In re Dorrance Estate, the court held that it was legal for more than one state to have an interest in the property of an individual. I.e. if domicile is found in two states.