It’s impossible to fully understand Estate Planning without considering the goals of the clients, along with their underlying assets. After all, many of the more advanced Estate Planning techniques depend upon obtaining discounts for assets and considering which technique to recommend based on a client’s assets. Some clients lack specific knowledge regarding not only the assets that they own but also the title to such assets, both of which shape the Estate Plan. Inexperienced attorneys may fail to use precise words when describing title and refer to property owned with another individual simply as “joint property.” Such individuals may fail to understand the difference between property held as joint tenants with rights of survivorship, tenants by the entirety, or as tenants in common.
If an individual owns the complete undivided interest in the property, that’s separate property, unless the individual resides in a community property state, as explained later. Generally, an individual may dispose of separate property freely. An owner may transfer separate property during life and bestow separate property upon death. Of course, a few exceptions to that general rule exist. For example, separate property states require a spouse to leave a minimum amount called the elective share to their surviving spouse upon death. If the decedent spouse fails to leave the appropriate amount, state statutes contain provisions that allow the surviving spouse to elect against the decedent’s elective estate to prevent the impoverishment of the survivor.
If a property has more than one owner, each of whom can transfer their interest in the property freely, then those individuals own the property as tenants in common. An interest held as a tenant in common works much the same as separate property. The owner has no restrictions on the disposition of the property either during life or at death. Many states use this type of ownership as a default when more than one owner exists on the title to an asset without specific reservation of rights of survivorship.
In contrast to ownership as tenants in common, if the co-owners reserve a right of survivorship in the property, then the owners hold the title as joint tenants with rights of survivorship. Property titled as joint tenants with rights of survivorship passes title to the survivors upon the death of one of the joint tenants automatically by operation of law. The other owners need not do anything to protect their ownership interest, although they may need to produce a death certificate to clear the title. While many individuals attempt to create a property that will pass in this manner, it often fails. To create joint tenants with rights of survivorship, the joint owners need the following unities upon acquisition of the property: interest, possession, time, title, and survivorship. If the owners lack any one of those unities, then the owners have created tenants in common property, rather than joint tenants with rights of survivorship. Every state recognizes this type of property ownership.
Some states recognize a special form of joint tenants with rights of survivorship called tenants by the entireties, available only for spouses. In addition to the unities described above, the parties need to have the additional unity of marriage at the time they acquire title to the property. Interestingly, not all states that recognize joint tenants with rights of survivorship recognize tenants by the entireties as a form of ownership. Even more interesting, in those states that recognize this form of ownership, some states allow it only for real property, while others recognize it for any type of property. The states that recognize the tenants by the entireties form of ownership afford property titled in this manner asset protection, meaning that only a creditor of both spouses can attach the property.
In contrast to property titled as tenants by the entireties, about fourteen states recognize another form of ownership available only to spouses known as community property. Community property means that each spouse owns one-half of any property acquired by either spouse during the marriage with two notable exceptions. First, if one spouse receives an inheritance that will remain the separate property of that spouse. Second, any earnings on separate property remain separate property. Community property provides various benefits, most importantly a step up in basis of the entire community property interest upon the death of one spouse, rather than just the decedent spouse’s portion, as would be the case for property held as tenants by the entirety, joint tenancy, or separate property. Community property states allow each spouse to dispose of their one-half of the community property without restriction. In pure community property states, no elective share rights exist, which allows for more flexibility in estate planning while guaranteeing that one spouse will keep at least their one-half share of the community property upon the death of the first spouse.
Unlike separate property or common law states, how clients hold title to property does not matter in a community property state. In determining whether property qualifies as community property one looks to the domicile at the time of acquisition of the property. Interestingly, California recognizes community property with rights of survivorship. In that situation, the title will pass automatically to the surviving spouse upon the death of the first spouse as it would with property held as joint tenancy or tenants by the entireties but with the added benefit of the double step-up in basis.