Effective Estate Planning Through Title Ownership and Beneficiary Designation
I love the use of title and beneficiary designations as part of my estate planning practice.
Many individuals mistakenly believe that the only way to achieve an effective estate plan in New Jersey is by having a will or a trust. While a will or a trust does control the disposition of an individual’s savings, real estate, and assets, the manner in which a person’s property is legally titled is also a very significant factor in developing an estate plan for the following reasons:
- How property is titled will determine legal ownership upon the owner’s death.
- How property is titled determines if probate in New Jersey is required.
- How property is titled will determine which property is subject to probate administration.
- How property is titled will determine the dollar amount of estate tax liability upon death.
- How property is titled will determine the amount of administrative expenses and attorney’s fees that the estate will have to pay.
- How property is titled will determine if income tax and gift tax is due.
The Importance of Legal Title to Your Assets and Property in Estate Planning
How to Correctly Designate Your Beneficiaries to Achieve Your Estate Planning Goals
Divorce and Estate Planning: The Importance of Correctly Naming Your Beneficiary Designation(s)
Let Me Show You the Ways Title and Beneficiary Designations Work
Sole Ownership Commonly Known as Individual Ownership
The primary characteristic of sole ownership is that the individual has absolute and singular ownership and control of his/her property. The entire value of individually owned property is included in the owner’s gross estate. A sole owner of property needs to plan for the transfer of his/her property when he or she dies. A sole owner can leave his or her property to whomever he or she wishes and may make a gift(s) of their property to one or more individuals in his or her last will. If the sole owner does not have a will or trust and dies, the property will pass to the decedent’s heirs and beneficiaries, according to the laws of New Jersey called intestate succession. New Jersey has its own statutes that govern intestate succession. These statutes determine how a decedent’s property passes to heirs and the amount that goes to each heir.
Sole ownership provides advantages that no other form of ownership offers. It is simple and flexible and can be transferred with the least amount of difficulty, inconvenience, formality and time delay. Sole ownership provides its owner with total and exclusive control over their property; the owner can sell, gift, convey, or pledge as collateral, the property without the prior consent of any other individual(s), prior to death.
Joint Tenancy with Right of Survivorship
This form of property ownership is frequently held between spouses and family members. Many people mistakenly believe that joint tenancy can only be held between spouses. Not so, property can be owned jointly with rights of survivorship between parent and child, brother and sister, business partner(s) and unrelated persons. It is important to note that the income, estate, and gift tax implications of jointly held property varies depending on who the other joint tenant(s) is (are).
The primary characteristics of jointly held property with rights of survivorship are the following:
Unlike sole ownership, property held in joint tenancy with the right of survivorship is shared by several owners. While it is frequently held by two owners, it is not uncommon to have the property held by three or more owners.
The distinguishing feature of joint tenancy is its survivorship feature. Upon the death of the first joint owner, the property immediately passes by law to the surviving joint tenant(s) in equal share(s).
The automatic survivorship feature of joint tenancy means that the subject property is not controlled by the terms of an owner’s will. Rather, the property passes automatically to the surviving joint tenant(s) and passes outside the terms of a deceased owner’s will or trust. For this reason, it does no good to place a provision in a will that controls the disposition of jointly held property after the owner’s death. This is a complicated planning issue. You should contact Fredrick P. Niemann toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com to learn more.
The survivorship feature of joint tenancy property causes the property to be excluded from the probate estate of the decedent.
Placing property into joint tenancy with the right of survivorship can result in gift tax liability. If proper planning does not occur, the original donor can face unexpected tax liability if the gift is of stocks, bonds, or real estate. There may be tax liability if the value of the property contributed exceeds the annual gift tax exclusion amount.
The estate tax implications of holding property in joint tenancy with right of survivorship are somewhat more complicated. According to the Internal Revenue Code, except for joint tenants who are husband and wife, the full value of jointly held property is included in the gross estate of the first joint tenant to die unless the survivor can prove contribution to the acquisition of the property or unless the survivor can establish ownership of some portion of the property before the joint tenancy was created.
A final concern regarding joint tenancy is the manner of terminating ownership. How is a joint tenancy normally terminated?
Generally, a joint tenancy cannot be terminated unilaterally by one of the joint tenants. If both parties are not willing to sell out to the other or change ownership to non-jointly owned, then it’s off to court by way of a partition action. This causes a breakup of the joint tenancy property; and creates a divided one-half interest in the entire property (assuming there are only two joint tenants).
Tenancy by the Entirety
New Jersey is one of just a handful of states that have this form of property ownership. Tenancy by the entirety is a form of joint tenancy property between husband and wife and, as such, possesses many of the characteristics of joint tenancy property. The survivorship feature is also found in tenancy by the entirety. Upon the death of the first married owner, the property automatically passes to the survivor owner outside the terms of the decedent’s will and outside the probate process. For estate tax purposes, the value of the property is divided between the spouses equally, with one-half the value of property included in the gross estate of the first tenant to die, and the full value of the property included in the gross estate of the surviving tenant.
Property held as a tenancy by the entirety differs from joint tenancy property in two significant aspects. They are:
- Only a husband and wife may hold the property as tenants by the entirety. This form of property ownership cannot be held between siblings, parent and child, or business partners.
- Like property held in joint tenancy, which cannot be served through the unilateral action of one of the joint tenants, property held in tenancy by the entirety can only be severed with the consent of both spouses. One spouse, acting alone, cannot sever the ownership form and transfer his or her share to a third party. Such an attempt will be challenged as a fraudulent conveyance in violation of the other spouse’s survivorship rights.
Tenancy in Common
Tenancy in common is a way in which property can be owned by several owners simultaneously. Tenants in common each own an individual interest in the property. (The divisible interest may be one-half (50%), one-third (33.3%), or one-fourth interest (25%) depending on the number of owners. It is also possible for one tenant in common to hold a two-thirds interest (66%) while another tenant in common holds a one-third interest (33.3%) in the property.)
Tenants in common are entitled to a division of income from an income producing property according to their fractional interest in the property. If each tenant in common owns a one-third interest (33.3%) in the property, each will be entitled to one-third of the net income generated by that property.
Legally, tenants in common are free to transfer their ownership interest in the property to other individuals. The property retains its status as a tenancy in common property and the consent of the other tenants in common is generally unnecessary when transferring title, absent a written agreement to the contrary.
Fredrick P. Niemann Esq.
For estate tax purposes, there is no automatic survivorship right(s) in property held by tenants in common. This means that upon the death of a tenant, his or her respective share of the entire property is included as an asset only in the owner’s gross estate.
You should seek qualified professional assistance to determine the most appropriate manner and form of title to your property. You can call Fredrick P. Niemann at (855) 376-5291 or email him at fniemann@hnlawfirm.com to schedule a consultation at your convenience to discuss this important topic.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Estate Planning Attorney
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