Types of Property Interests in Finance

1. Finance 553 Types of Property Interests

2. Types of Property Interests • Types of Property • Real Estate • Land • Permanently Attached to Land • Fixtures • Tangible Property – physical characteristics determine value of property • Intangible Property – physical characteristics do not impact value, only rights to cash flow

3. Types of Property Interests • Property Interests • How is property held in title • Who has use of property • How long does one have use of property • Can one transfer title of property • Without regard to others with interest • With agreement of others with interest • What are the issues with transfer in terms of • Timing • Taxes • What are the issues, concerns, or potential problems for a financial planner?

4. Types of Property Interests • Sole Ownership – Fee Simple • Ability to use, consume, dispose, or transfer is the exclusive right of the owner • Property is valued at fair market value for estate purposes • FACTS: • One owner • No automatic survivorship right • Included in probate (transfer of property via court after death of owner) • Real Property • If in state of residency, part of probate • If in state other than residency, subject to ancillary probate

5. Types of Property Interests • Fee Simple – Example • John owns a house under fee simple… • He can sell it at anytime • He can transfer it at anytime to another • Upon death is part of estate and subject to will (if specifically mentioned) or state inheritance rules if not in will • If John is married, does wife automatically get the house? • If John has children, do they automatically qualify for ownership or part ownership of the house? • Can John use the property for any purpose he so chooses? • What are the issues, concerns, or potential problems for a financial planner?

6. Types of Property Interests • Tenancy in Common • Two or more individuals own the property • Each has an undivided share in the property • Interests are not required to be equal • Most common form of “dual” ownership for non-spouse parties • Property interest owned outright, that is, property can be transferred to a third party without consent of other owner(s) • Co-owners not responsible for debts of other interests • FACTS • At least two distinct owners • No automatic survivorship feature • Interest included in estate at fair market value • Property can be severed if all interests agree or by court decree

7. Types of Property Interests • Tenancy in Common – Example • Alvin, Simon and Theodore own a commercial building • Original price of building $500,000 • Alvin paid $250,000, Simon paid $175,000 and Theodore $75,000 • Interests (shares) are, Alvin 40%, Simon 35%, Theodore 25% • Current fair market value $800,000 • Is there a gift in the acquisition? • Simon falls into financial difficulty… • Can he sell his interest? • Does he need Alvin and Theodore to agree to new interest? • Theodore passes and via his will, passes ownership interest to daughter • What is the estate value of the property passed to daughter • What is the current value for Simon and Alvin • Theodore’s daughter does not want the interest, what are her options?

8. Types of Property Interests • Joint Tenancy with Rights of Survivorship (JTWROS) • Two or more individuals own the property • Each has an undivided share in the property • Interests are not required to be equal • At death of first joint tenant property passes automatically to surviving interests • Property interest owned outright, that is, property can be transferred to a third party without consent of other owner(s) • Co-owners may be liable for debts of other joint tenants (creditor may claim and receive entire property to settle outstanding debt) • FACTS • At least two distinct owners • Automatic survivorship feature • Interest included in estate at fair market value

9. Types of Property Interests • Joint Tenancy with Rights of Survivorship – Example • Florence, Mary, Diana, and Betty own a lake-side vacation home in JTWROS • Original price of vacation home $1,200,000 • Each paid $300,000 • Interests (shares) are equal 25% each • Current fair market value $2,700,000 • Betty sells her interest to Barbara – what are the implications? • Barbara decides to sell but the three remaining buy the interest • At this time fair market value is $3,500,000 • How much is the cost to each if they want to retain equal shares? • Diana wants out completely – what are her options?

10. Types of Property Interests • Tenancy by the Entirety • FACTS • Ownership of property by a married couple • Ownership cannot be severed without consent of the other tenant • Automatic survivorship to remaining spouse at death • Couple can change ownership structure • Usually to Tenancy in Common where individual interests are determined for the property • No gift tax triggered at change • Community Property States vs. Common Law States • Couples have equal undivided interests in all property acquired during the marriage other than inheritance • Commingled property usually becomes community property

11. Types of Property Interests • Tenancy by the Entirety – Example • Sonny and Cher are a legally married couple in a community property state • After the marriage they acquire a house, cars, personal property worth $3,000,000 • Cher inherits a stock portfolio worth $200,000 • Sonny buys a record label for $600,000 during the marriage with funds from his income • Cher wants to sell the stock and buy a new car, does she need Sonny’s approval? • Sonny and Cher break-up (and elect to divorce) • What is included in the estate of Sonny? Value of Estate? • What is included in the estate of Cher? Value of Estate?

12. Types of Property Interests • More on Community Property , Joint Ownership with Spouse • The basis of the law comes from Spain and is civil law in the following states: • Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Wisconsin • Alaska allows individuals to enter into community property arrangements for in-state assets • Community Property does not usually carry rights of survivorship • Property can be divided interests when one spouse dies • California and Texas have rights of survivorship options • Common Law issues from common law states • Moving from community property – spouse may gift tax free • Moving to community property – all new acquisitions are community

13. Types of Property Interests • Partial Ownership Interests • Life Estate - Separate from Tenancy in Common Party has rights for a limited period – Life Tenant Rights to income or use of property while alive Transfers to remaining beneficiary (remainderman) Rights generally excluded from estate of Life tenant • Usufruct – Louisiana form of Life Estate • Term Interest • Party has rights to income or use of property for a defined period of time • At end of period property interests are transferred to remainderman • Legal vs. Equitable Ownership

14. Types of Property Interests • Partial Ownership Interests – Example • Bill owns a home but grants Bobby partial ownership interest that allows Bobby to live in the home until his death • The home is fee simple titled to Bill • The home’s current fair market value is $450,000 • Bobby currently lives in the home with a partial ownership interest • Bill decides he wants to sell the property • Can he unilaterally terminate the partial ownership interest, sell the property and force Bobby to move out? • Can he sell the property with the partial ownership interest in tact? • Bill passes away, what happens to the property? • Bobby passes away and his son is living in the property with Bobby – does the son have any rights to stay in the home?

15. Types of Property Interests • Usufruct (In Louisiana) • Life Interest -- but with different terminology • Usufruct interest is the partial interest • Naked owners are the remaindermen • Usufruct can terminate at death or remarriage • Spouse has right to “house” while alive and terminates at death • Spouse has right to “house” while single and terminates at remarriage • Term Interest • Partial interest is defined for a specific and definite period • Can be for property use or income • Legal vs Equitable Ownership – equitable ownership only provides rights to use or enjoy economic benefits

16. Types of Property Interests • Summary of Ownership Interests • Types: • Fee Simple • Tenancy in Common • Joint Tenancy with Rights of Survivorship (JTWROS) • Tenancy by Entirety (Married Couple) • Partial Ownership Interest • Community Property States • Property acquired after marriage • Tenancy in Entirety without regards to contribution • Inheried property outside community property unless co-mingled.

17. Types of Property Interests • What are the implications for Financial Planning? • Assets need to be clearly titled prior to making wills, trusts, etc. • In a marriage, state of residency at time of acquisition may be important • For wills, property transfer requests must be consistent with ownership interests • Transferring property into a trust must meet legal requirements to transfer assets based on ownership rights • Untitled property may be listed in wills or trusts but all parties to the document (will or trust) must agree • Other issues?