Effective Estate Planning By the Use of Title and Beneficiary Designation

Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Estate Planning Attorney

estate-planning-Durable-Power-of-AttorneyI 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 lies in having a will or a trust. While a will or a trust does control the disposition of an individual’s savings 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:

  1. The way in which property is titled can determine who will receive the property upon the owner’s death.
  2. The way in which the property is titled determines if probate in New Jersey is required.
  3. The way in which the property is titled can determine the amount of property that is subject to probate administration.
  4. The way in which the property is titled can determine the amount of estate tax liability upon death.
  5. The way in which the property is titled can determine the amount of administrative expenses and attorney’s fee that the estate pays.
  6. The way in which property is titled can determine the how much income tax and gift tax is due.

How to Designate your beneficiaries:

The Important of Legal Title in Estate Planning:

Divorce and Estate Planning: The Importance of Correctly Naming Beneficiary Designation

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 one individual has absolute ownership and control of the property. If the solely owned property produces income, all income must be reported by the owner. For New Jersey estate tax purposes, the entire amount of the solely owned property will be included in the sole owner’s gross estate. The sole owner of property needs to plan properly for the transfer of the 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) of the property to one or more individuals in his will. If the sole owner does not have a will and dies, the property will pass to the decedent’s heirs and beneficiaries, according to the law of New Jersey intestate succession. New Jersey has its own separate statutes for intestate succession. The statutes determine how the property passes to heirs and the amount that goes to each heir. Sole ownership provides advantages that no other form of ownership provides. It is the most simple and flexible form of property ownership and can be transferred with the least amount of inconvenience, formality and time delay. Sole ownership provides the owner with total and exclusive control over the property; the owner can sell, gift, convey, or pledge as collateral, the property without the consent of any other individuals.

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, and business partner(s) and unrelated persons. It is important to note that the income, estate, and gift tax implications of jointly held property can vary, depending on who the other joint tenant(s) is (are).

The primary characteristics of  jointly by held property with rights of survivorship are the following:

Unlike with 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 tenant, the property immediately passes to the surviving joint tenant(s) in equal share(s).

The automatic survivorship feature of joint tenancy means that such property is not controlled by the terms of a will. Rather, such property passes automatically to the surviving joint tenant(s) and passes outside the terms of a will or trust. For that 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 technique. 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 gift tax liability if the gift is of stocks, bonds, or real estate. There may be gift 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 can be terminated unilaterally by one of the joint tenants. This causes a break up of the joint tenancy property; and creates a divided interest in the entire interest in one-half the 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 in joint tenancy property. The survivorship feature is also found in tenancy by the entirety. Upon the death of the first tenant, the property automatically passes to the survivor outside the terms of the decedent’s will and outside the probate process. For estate tax purposes, the property is divided between the spouses equally, with only 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 in tenancy by the entirety does differ from joint tenancy property in two significant aspects.

Only 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.

Unlike property held in joint tenancy, which can be served through the unilateral action of one of the joint tenants, property held in tenancy by the entirety can only be served 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 could 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 undivided interest may be one-half, one-third, or one-fourth interest (1/2, 1/3, 1/4), depending on the number of tenants in the specific relationship. 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 a income producing property according to their interests in the property. If each tenant in common owns an undivided one-third interest in the property. Each will be entitled to one-third of the income from that property.

Tenants in common are free to transfer their respective shares of the property to other individuals. The property retains its status as tenancy in common property and the consent of the other tenants in common is generally unnecessary when transferring title.

For estate tax purposes, there is no survivorship rights in property held in tenancy in common. For the holder of such an interest, this means that upon the death of the holder, his or her respective share of the entire property is included as an asset in the holder’s gross estate.

If you own property, one important thing to consider as a tenant in common with another person you should seriously consider creating a partnership agreement, or shareholders agreement to avoid potentially disruptive consequences. To learn more about this subject you can contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com for a low cost consultation.

Fredrick P. Niemann Esq.

Fredrick P. Niemann Esq.

When is it appropriate to use solely owned property as a form of property ownership? Generally, there are no absolute rules for determining the answer to this question.

You should seek qualified professional assistance to determine the most appropriate manner and form of title to 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.

 

 

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