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The form of ownership that is used for a person’s assets can have significant consequences to an individual during their lifetime, and after their death. It is important that clients recognize the significance of the ownership form of their assets to ensure that their interest is protected.

The Significance of Ownership Form

Part of the estate-planning process involves gathering information about how assets are owned.

Ownership and titling can have a major impact on how and to whom property will pass at death. If assets are not titled properly, an estate plan may prove to be ineffective. To better understand how property passes, it is helpful to look at the various forms of ownership.

•   Individual ownership

•   Joint tenants with right of survivorship

•   Tenancy by the entirety

•   Tenants in common

•   Community property

Individual Ownership

The key characteristics of individual ownership include:  

•   Property is owned entirely by one person

•   It is the simplest form of ownership

•   It is often referred to as “fee simple”

 

There are several advantages to individual ownership, in addition to it being the simplest form of ownership:

 

•   The owner is free to do anything with the property he/she wants to without needing approval from anyone else

 

•   Any gains and losses are taken on the owner’s personal tax return. This means that all gains and losses are taxed directly to the individual rather than to the ownership entity itself

 

•   All income goes to the owner Disadvantages of individual ownership include:

 

•   Does not automatically transfer to beneficiaries, resulting in potential compromise of asset transferability. At the death of the single owner, the property does not automatically go to another person. Instead, the asset is distributed through the terms of the decedent’s will. If the decedent did not have a will, the asset will be passed through intestate succession (the state’s rules of a decedent’s asset distribution where the decedent did not execute valid estate planning documents)

 

Unlimited liability for assets exists with single property ownership. If someone is injured on a property, the person who owns the property is liable for any judgments rendered against them. If the single owner needs to sell all of his/her assets in order to pay the claim, he/she may be required to do it

Joint Tenants with Right of Survivorship

The key characteristics of joint tenants with right of survivorship include: 

•   Assets owned by more than one owner

•   No limit to the number of potential owners

•   At death, assets pass equally to surviving joint owners

The advantages of joint tenancy include:

 

•   All owners hold an equal, undivided share of the property, e.g. if there are three owners, each owner has a one-third interest in the property. Each owner always owns an interest equal to the other owners. Disproportionate ownership is not permitted.

 

•   Survivorship provision allows property to bypass probate process. When one of the owners die, the decedent’s interest is divided equally among the surviving joint owners. Since the property automatically transfers to the surviving joint owners, the asset avoids probate in the estate of the decedent. Also, this means the property is fully accessible to the joint owners. The asset is not tied up in probate while the court decides who is entitled to the asset.

 

The disadvantages of joint tenancy include:

 

•   There is a potential that gift tax issues could arise.

 

•   Could frustrate terms of a will. At death of a joint owner, property transfers to the surviving joint owner(s). The decedent joint owner’s will is meaningless. If the father owns an asset jointly with his spouse and his will says the asset is to go to his daughter, the property will go to the wife, not the daughter, because the wife is joint owner.

 

•   Any asset owned by joint tenancy with rights of survivorship is subject to the claims of the creditors of any of the owners. If there are three joint owners and joint owner B declares bankruptcy, then B’s creditors may have legal claim on the entire asset.

 

•   Any change in asset ownership may require signature or consent of all owners.

 

•   Not available in all states.

Tenancy by the Entirety

In some states, married couples may own property tenancy by the entirety. This type of ownership is similar to joint tenancy with rights of survivorship, except that tenancy by the entirety can only be between spouses. Property passes by right of survivorship to the surviving spouse. Neither spouse can dispose of the asset without consent of the other spouse. Also, the asset is not subject to the claims of creditors, if only one spouse is responsible for the debt. These two points provide each spouse with a sense of security.

Please note that this form of ownership is not available in all states.

Tenants in Common