Chapter 7: Ownership and transfer of property.
Ownership of Property
There are various ways in which property can be owned. In general, property is owned outright, as tenants in common, as joint tenants with rights of survivorship, or as community property (in some states, such as California, including community property with right of survivorship).
Outright ownership is often as simple as: John owns an automobile, or Mary owns a diamond necklace. John and Mary are generally free to do whatever they want with their property. Of course, if John borrowed money to purchase the automobile, the lender generally has the right to recovery of any outstanding loan upon a transfer of the automobile. In this situation, although John may generally be free to use the automobile as he pleases, John can really transfer only the value of the automobile in excess of the loan.
Life Estate / Remainder
Sometimes outright ownership can be split into a life estate and a remainder. A person with a life estate is generally free to use the property or income from the property for life. The person with the remainder interest receives the property when the person with the life estate dies. For example, Mike owns a house. When Mike dies, Mike leaves the house so that his sister, Sally, can live in the house for her life. Sally has a life estate. When Sally dies, the property will pass to Mike's nephew, Bob. Bob has a remainder interest.
Tenancy in Common
A tenancy in common is a form of co-ownership of property. Tenants in common own an undivided right to possess property. Each tenant is generally free to transfer his interest in the property as he wishes.
Joint Tenancy with Right of Survivorship
Another form of co-ownership of property is a joint tenancy with right of survivorship. Joint tenants also have an undivided right to the enjoyment of property. However, when a joint tenant dies, that person's interest in the property passes to the remaining joint tenant or joint tenants. While a joint tenant is alive, a joint tenant can generally sever the joint tenancy or transfer his interest to another.
For example, Dad leaves a vacation home to his three children, Tom, Ann, and Rita, as joint tenants with right of survivorship. Ann dies first. The vacation home is then owned by Tom and Rita as joint tenants. Tom dies next. Rita succeeds to outright ownership of the vacation home.
Tenancy by the Entirety
In some states, a joint tenancy with right of survivorship between spouses is called a tenancy by the entirety. When one spouse dies, the jointly owned property passes to the surviving spouse. However, while both spouses are alive and married to each other, one spouse cannot terminate a tenancy by the entirety without the consent of the other spouse.
Ten states have a form of ownership between spouses called community property. Those states are Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
In a community property state, the couple's earnings are community property and therefore each spouse owns a one-half interest in property acquired with such earnings while the spouses are married. (In Alaska, on the other hand, property is not community property unless the couple agrees that property acquired during marriage is the community property of the spouses.) Each spouse is generally free to transfer his one-half interest in the property at death as he wishes. However, while both spouses are alive and married to each other, one spouse cannot dispose of the community property without the consent of the other spouse.
Community property can be important even if a couple does not currently live in a community property state. Community property generally remains community property even when the spouses move to a noncommunity property state.
Certain property is noncommunity property even if a couple live in a community property state. Property that a spouse acquired prior to marriage remains the separate property of that spouse. Also, property acquired individually by one spouse by gift or inheritance during marriage is also the separate property of that spouse. Additionally, property acquired by a couple prior to moving to a community property state would generally remain noncommunity property.
Spouses are generally free to make agreements regarding community property. For example, the spouses can agree that what would otherwise be community property is not community property. Generally, such agreements must be in writing.
Totten Trust, POD, TOD
Totten trusts, payable on death (POD) accounts, and transferrable on death (TOD) accounts are available in most states. These all provide for automatic transfers of certain types of property at death to a named beneficiary, while avoiding probate.
For a totten trust, a person can deposit money into a bank account in his own name as trustee for another person. Generally, such a transfer is revocable until such person provides otherwise (e.g., gives passbook to donee) or dies. If the person dies without having revoked the totten trust provision, the donee receives the bank account.
A payable on death (POD) account is very similar. A person deposits money into a bank account in his own name and designates that the account is payable on death to a named person. The transfer to the account is generally revocable. If the person dies without having revoked the POD provision, the donee receives the bank account.
A transferrable on death (TOD) account is similar to a POD account, except that TOD provisions are used with stocks, mutual funds, and other accounts holding securities.
Transfers of Property
During lifetime, a person can generally transfer interests the person owns by gift, either outright or in trust. See Chapter 22 regarding gifts.
At death, property generally passes by contract, form of ownership, will, or intestate succession. Property passes by intestate succession when a person dies without a will. There are some limitations on how a person can pass property.
Examples of property passing by contract generally include life insurance and annuity proceeds, and retirement benefits. At the death of the insured or participant, life insurance and annuity proceeds and retirement benefits pass to the person who has been named beneficiary on the beneficiary designation form. If a beneficiary is not named, the property will generally pass to the owner's estate and be disposed of in the owner's will or by intestate succession.
Property owned jointly with right of survivorship passes to the survivor or survivors by operation of law when a joint tenant dies.
If the property owned by a decedent does not pass automatically by contract or form of ownership, it will pass to the decedent's estate. If the decedent has a will, the property would then pass as provided in the will. Otherwise, the property will pass as provided by state law under the rules for intestate succession.
A will is a legal instrument by which a person leaves certain instructions for after death. A will is generally used to dispose of a decedent's property. However, a will can also provide for other matters, such as the naming of an executor, or a guardian for minor children.
A will must be executed with certain formalities. A will is generally a written document and must be signed by the person creating the will at the end of the document. The person creating the will is often called a testator.
The will must also generally be signed by witnesses who attest to the capacity of the testator to make a will. Two witnesses are required in most states. It may be desirable to have three witnesses. The third witness can serve as a backup witness, even if only two witnesses are required.
A person must have the capacity to make a will at the time that the will is executed. Capacity means that the testator must (1) be of legal age, (2) understand the extent of his property, (3) understand the natural objects of his bounty, and (4) understand the nature of his dispositions.
The legal age to make a will is 18 in many, but not all, states.
Understanding the extent of his property means the testator knows in general that he owns a home in Ohio and a home in Florida, two life insurance policies, retirement benefits, two bank accounts, three mutual funds, household possessions, etc.
The natural objects of the testator's bounty might include, for example, a spouse and three children. The testator must also understand the nature of his dispositions. For example, that his spouse Mary gets the house, his brother Tom gets $10,000, his sister Janet gets the antique ring, his estranged son Mike gets nothing, and Mary gets everything else.
A will does not take effect until the testator dies. The testator is generally free to revoke or change his will up until his death.
A will can provide three types of legacies: a specific legacy, a general legacy, and a residual legacy.
A specific legacy disposes of a specific piece or pieces of property. For example, the will might leave "all personal and household effects to my wife Rachel."
Or the will might leave "my 1962 Corvette to my niece Heather." If the property that is the subject of a specific bequest does not exist at the testator's death, in most states, the legatee receives nothing. For example, if the Corvette does not exist at the testator's death, Heather gets nothing.
A general legacy disposes of a certain amount or value of property. For example, the will might leave "$10,000 to my nephew Ralph." If there is $10,000 of property remaining after specific legacies have been satisfied, Ralph will get $10,000 even if property must be sold.
A residual legacy disposes of all property that has not been disposed of through specific and general legacies. In other words, a residual legacy disposes of everything that is left after all other legacies have been satisfied.
A legatee is a person who receives a legacy from the testator.
Frequently, the residual legatee is a primary beneficiary. For example, the residual legatee might be the testator's spouse. The testator should take into consideration that the residual legatee may get nothing if the estate should shrink and the specific and general legacies wipe out the estate.
If a specific or general legatee is not alive at the time of the testator's death, the specific or general legacy lapses and passes to the residual legatee. However, some states provide that a specific or general legacy for certain persons related to the testator does not lapse but rather goes to descendants of the legatee. If the testator does not wish this result, the testator can provide a legacy "if he survives me."
The testator can provide by will which legacies are to bear the burden of death taxes. Such a provision can substantially affect the amount received by any legatee. In the absence of such a provision, most states would apportion the death taxes among all legacies. A few states would charge the death taxes to the residuary estate.
A will should periodically be reviewed. Questions such as the following should be asked:
* Does the testator still live in the same state?
* Does the testator own real estate in another state?
* Is the testator still married to the same person?
* Does the testator wish to change any beneficiaries?
* Does the testator have any new relatives, such as a newborn child? Have any beneficiaries died?
* Has state law on wills changed? Have tax laws changed?
At the testator's death, the will must be offered for probate. The probate court will establish the validity of the will and oversee its enforcement.
For more on wills, see Chapter 8 and Chapter 9.
There are certain limitations on how a decedent may dispose of his property at death.
Under state law, a surviving spouse is generally given a right to elect to take against the will. Such a right allows the spouse to receive a statutory share of the decedent's estate, even if the decedent provided otherwise. The statutory share is often equal to the fraction of the decedent's estate that the spouse would receive under the rules for intestate succession, discussed later. Thus, a surviving spouse is usually entitled to at least a third or a half of the decedent's estate.
The spouse's right to elect against the will can be waived by agreement during lifetime. For example, the right to elect might be waived in an antenuptial agreement.
In some states, a surviving spouse might be given a homestead right. Such a right would generally permit the surviving spouse to live in the family home during such spouse's lifetime. In some states, children might also be given homestead rights.
In most states, an allowance is provided to the surviving spouse and children for a period of time after the decedent's death. The period might be for six months or a year. The allowance is designed to provide support for the family until the estate is administered.
In many states, exemptions are provided for certain property. For example, the surviving spouse and children might be entitled to certain household furnishings or clothes.
In most states, a child born or adopted after the execution of a will is entitled to share in the estate if provision is not otherwise made for the child. In some states, a child alive at the time of the execution of the will who is omitted from the will is entitled to share in the estate unless it appears the omission was intentional.
A few states provide that a will executed before marriage is revoked upon marriage. A few states provide that such a will is revoked unless other provisions are made for the new spouse. Conversely, most states provide that provisions in a will for a former spouse are revoked upon divorce.
A few states still have "mortmain" statutes that restrict the amount that may go to charity if a decedent is survived by a spouse or child.
If a decedent does not have a will, property generally will pass as provided by state law under the rules for intestate succession. The rules for intestate succession essentially make a will for the decedent. They do this by prescribing that property will pass in certain proportions to persons who are of certain relationships to the decedent.
As described previously, some property owned by a decedent passes automatically by contract or form of ownership rather than by will or intestate succession.
The rules for intestate succession vary widely from state to state.
Typically, a spouse with children would receive either (1) some dollar amount plus a fraction of the estate, or (2) some fraction of the estate. The fraction received by the spouse is often one-third or one-half of the estate. The children would receive the balance of the estate.
Where there is a spouse but no children, the spouse takes all in many states. In some other states, the spouse might be given a fraction of the estate (as above), but the parents or brother and sisters of the deceased would take the balance.
A trust is a fiduciary relationship in which property is held by one (or more) person(s) for the benefit of one (or more) person(s). The person creating the trust is generally called a settlor, trustor, or grantor. The grantor typically executes a trust document and transfers property to the person who will be responsible for administering the terms of the trust, who is called a trustee. The person for whose benefit the trustee administers the trust is called a beneficiary. The property held in trust is often called the trust corpus or res.
State law controls the creation, operation, and termination of a trust. Common law is generally controlling except to the extent that a state has enacted a statute dealing with a particular aspect of trusts. The trust may generally have any terms except to the extent that a term is illegal or against public policy.
Theoretically, the law of any state with which the trust has contact could apply. Such states could include the state where the grantor resided upon creation of the trust, where the trustee is located or resides, where trust property is located (especially with regard to real estate), or where the beneficiaries reside. The grantor may specify in the trust document the state whose laws are to be applied to the operation and termination of the trust.
Usually, the beneficiaries of the trust are the grantor and/or members of the grantor's family. Having a charity as a beneficiary is also very common.
A trust may provide for management of property, accumulation or distributions of income to beneficiaries, distributions of trust corpus to beneficiaries, withdrawal powers in beneficiaries, and other powers of appointment.
Trust interests are often split it into an income interest and a remainder. A beneficiary with an income interest receives income from the property for a period of years or for life. The beneficiary with the remainder interest receives the property when the income interest ends.
Trusts arising at death (testamentary trusts) are subject to probate at the grantor's death. On the other hand, trusts created during lifetime (inter vivos trusts) are generally not subject to probate.
Trusts created during lifetime are either revocable or irrevocable; a trust created at death is irrevocable. A revocable trust is a trust in which the grantor retains the right to revoke the trust; upon revocation, property in the trust would be returned to the grantor. A trust that is not revocable is irrevocable.
There are many income, gift, estate, and generation-skipping transfer tax implications to trusts (see Chapters 15 to 19, in general, regarding taxes). In fact, many of the popular trusts, such as those discussed in Chapter 24 (marital trusts and credit shelter bypass trusts), Chapter 31 (irrevocable life insurance trusts), Chapter 26 (grantor trusts), and Chapter 33 (charitable trusts and wealth replacement trusts), are designed and utilized, at least in part, to obtain favorable tax treatment.
A revocable trust is taxable to the grantor for income tax purposes. The grantor is not treated as making a gift upon transfer of property to a revocable trust; however, a revocable trust is includable in the grantor's estate at death. See Chapter 28 regarding revocable trusts.
The grantor of an irrevocable trust generally makes a gift upon transfer of property to an irrevocable trust. Whether the grantor is taxable upon trust income or whether the irrevocable trust is includable in the grantor's estate generally depends on what interests the grantor has in the irrevocable trust.
Rule Against Perpetuities
Interests of a beneficiary in a trust must generally vest within the period allowed for in the rule against perpetuities. For example, all members of a class must generally be ascertainable immediately or within the period allowed for in the rule against perpetuities. And a beneficiary must generally be born within the period allowed for in the rule against perpetuities.
The common law version of the rule against perpetuities generally provides that interests in property must vest no later than a life in being plus 21 years (plus a gestation period, if necessary). Interests that did not vest within the rule against perpetuities at the creation of a trust would be void. Many states have a version of the common law rule against perpetuities (sometimes codified). Other states have adopted a "wait and see"' approach; that is, an interest is only void if the interest actually fails to vest within the perpetuities period. The Uniform Statutory Rule Against Perpetuities (1990) (some version of which is in effect in approximately one-half the states) provides that a nonvested interest is invalid unless (1) as of the date of the creation of the trust, the interest is certain to vest or terminate within a period measured by a life in being plus 21 years (plus a gestation period, if necessary), or (2) the interest either vests or terminates within 90 years of its creation. Some states have eliminated the rule against perpetuities.
Trusts should be drafted so as to comply with the rule against perpetuities (if applicable). A clause may also be inserted that provides that any interest must vest within the time provided by the rule against perpetuities.
In a broad sense, a spendthrift provision is a provision in a trust in which the grantor attempts to provide funds to a beneficiary while limiting the ability of the beneficiary to squander the funds or creditors of the beneficiary from reaching the funds. Spendthrift provisions might include any of the following: (1) prohibition of beneficiary transferring the beneficiary's interest; (2) forfeiture of beneficiary's interest if beneficiary attempts to transfer interest; (3) distributions of income or principal to a beneficiary limited to support of the beneficiary (possibly, limited to distributions on behalf of beneficiary for support rather than distributions directly to beneficiary); (4) distributions to a beneficiary at the trustee's discretion; or (5) prohibition against creditors reaching beneficiary's interest.
There is a considerable amount of diversity among the states as to when a creditor of a beneficiary can reach the beneficiary's trust interest. Unless the trust document or state law provides otherwise, a creditor of a beneficiary can generally reach the beneficiary's trust interest.
State laws generally attempt to restrict the ability of a grantor to prevent creditors from reaching a beneficiary's interest in one of the following ways: (1) no restriction, creditor can reach trust interest; (2) creditor can reach amount not needed by beneficiary for support; (3) creditor can reach amount above some dollar amount; or (4) creditor cannot reach trust property.
ASRS: Sec. 46-50.
(1.) This chapter is derived from Estate Planning and The Ultimate Trust Resource, both written by William J. Wagner and published by The National Underwriter Company.