Types of

Property
 
Interests
 Types of Property
o Real Estate
• Land
• Permanently Attached to Land
• Fixtures
o Tangible Property – physical characteristics
determine value of property
o Intangible Property – physical
characteristics do not impact value, only
rights to cash flow
 Property Interests
o How is property held in title
o Who has use of property
o How long does one have use of property
o Can one transfer title of property
• Without regard to others with interest
• With agreement of others with interest
o What are the issues with transfer in terms of
• Timing
• Taxes
 What are the issues, concerns, or potential problems
for a financial planner?
 Sole Ownership – Fee Simple
o Ability to use, consume, dispose, or transfer is the
exclusive right of the owner
o Property is valued at fair market value for estate purposes

 FACTS:
o One owner
o No automatic survivorship right
o Included in probate (transfer of property via court after
death of owner)
 Real Property
o If in state of residency, part of probate
o If in state other than residency, subject to ancillary probate
 Fee Simple – Example
o 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
o If John is married, does wife automatically get the house?
o If John has children, do they automatically qualify for
ownership or part ownership of the house?
o Can John use the property for any purpose he so chooses?

 What are the issues, concerns, or potential

problems for a financial planner?
 Tenancy in Common
o 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
o At least two distinct owners
o No automatic survivorship feature
o Interest included in estate at fair market value
 Property can be severed if all interests agree or by court
decree
 Tenancy in Common – Example
o 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
o Is there a gift in the acquisition?
o Simon falls into financial difficulty…
• Can he sell his interest?
• Does he need Alvin and Theodore to agree to new interest?
o 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
o Theodore’s daughter does not want the interest, what are her
options?
 Joint Tenancy with Rights of Survivorship (JTWROS)
o 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
o At least two distinct owners
o Automatic survivorship feature
o Interest included in estate at fair market value
 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
o Betty sells her interest to Barbara – what are the implications?
o 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?
o Diana wants out completely – what are her options?
 Tenancy by the Entirety
 FACTS
o Ownership of property by a married couple
o Ownership cannot be severed without consent of the other
tenant
o Automatic survivorship to remaining spouse at death
 Couple can change ownership structure
o Usually to Tenancy in Common where individual interests are
determined for the property
o No gift tax triggered at change
 Community Property States vs. Common Law States
o Couples have equal undivided interests in all property
acquired during the marriage other than inheritance
o Commingled property usually becomes community property
 Tenancy by the Entirety – Example
o 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
o Cher wants to sell the stock and buy a new car, does she
need Sonny’s approval?
o 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?
 More on Community Property , Joint Ownership with
Spouse
o 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
o 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
o 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
 Partial Ownership Interests
o 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
o Usufruct – Louisiana form of Life Estate
o 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
 Partial Ownership Interests – Example
o 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
o 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?
o Bill passes away, what happens to the property?
o Bobby passes away and his son is living in the property with
Bobby – does the son have any rights to stay in the home?
 Usufruct (In Louisiana)
o Life Interest -- but with different terminology
• Usufruct interest is the partial interest
• Naked owners are the remaindermen
o 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
o Partial interest is defined for a specific and definite period
o Can be for property use or income

 Legal vs Equitable Ownership – equitable ownership

only provides rights to use or enjoy economic benefits
 Summary of Ownership Interests
o Types:
• Fee Simple
• Tenancy in Common
• Joint Tenancy with Rights of Survivorship (JTWROS)
• Tenancy by Entirety (Married Couple)
• Partial Ownership Interest
 Community Property States
o Property acquired after marriage
• Tenancy in Entirety without regards to contribution
• Inheried property outside community property unless co-
mingled.
 What are the implications for Financial Planning?
o Assets need to be clearly titled prior to making wills,
trusts, etc.
o In a marriage, state of residency at time of acquisition
may be important
o For wills, property transfer requests must be consistent
with ownership interests
o Transferring property into a trust must meet legal
requirements to transfer assets based on ownership
rights
o Untitled property may be listed in wills or trusts but all
parties to the document (will or trust) must agree
o Other issues?