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Where there's a will, is there really a way?

Where There's a Will, Is There Really a Way?

For most of you, and for your clients, writing a will is not a very complex process. It's merely a matter of deciding how property owned will be distributed among any heirs. Property owned is generally a collection of very basic real estate, bank accounts, insurance and maybe some stocks and bonds. But is it all as straightforward as it seems? Will property be conveyed according to the decedent's wishes? Or are there factors which will complicate even the simplest arrangements? What happens if the client wants to gift some of the property during his or her lifetime? Is there a place for the accountant in this process?

Obviously I'm leading up to a discussion of those items which must be considered when a will is written, when an estate is planned or when a gift is contemplated. This column will discuss just two areas in which problems can arise when there is no information available or when inadequate information is present.

The first of these is property ownership. Before property can be conveyed to another, whether by a gift or through a will, ownership must be established. In the case of ownership by more than one person, it is necessary to look beyond the title.

Co-ownership of property has four possible forms: tenancy in common, joint tenancy, tenancy by the entirety and community property ownership.

Tenancy in common exists when two or more people hold title to the property, each owning a part of the whole. It is not necessary for each person to own the same percentage of the property. For each individual this type of ownership is equivalent to owning the property outright. The individual may dispose of his share as he wishes. It can be sold, gifted or willed to another. In case of a disagreement among the owners, a right of partition exists. A court order may be obtained forcing the division of the property or, in cases where physical division is not possible (for example, an oil well), forcing the sale of the property and the division of the proceeds.

Joint tenancy is also an arrangement where two or more people hold title to a property. However, in this case, each person owns an identical share and usually has a right of survivorship (JTWROS). Upon the death of one joint tenant, the property passes automatically to the remaining tenants. Joint tenants do have the right to terminate their interest in the property, thus ending the joint tenancy.

Tenancy by the entirety is a special form of joint tenancy limited to ownership by husband and wife. In most states this type of ownership cannot be terminated without the consent of both owners. And in some states the husband has full control over the property and any income from it.

Community property consists of property acquired by mutual efforts of both husband and wife during the marriage. This form of ownership is recognized by eight states; Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington. Property acquired before marriage or by inheritance is "separate property". However, when separate funds are commingled, they lose any distinction and become part of the community property.

An additional form of ownership is marital property. This is a legally recognized form of property ownership under the Uniform Marital Property Act. Under the marital property concept, spouses share equally in property acquired during their marriage. This is a vested present interest in property acquired by their combined or individual efforts.

As can be seen, if property is held by more than one individual and even in some cases where title is held in one name, it is necessary to look further to determine whether that individual has the right to transfer the property.

Assuming ownership has been established, we can move to the second area of discussion -- property transfers. Any portion of property which is owned outright can be transferred as the owner wishes. It can be gifted during a person's lifetime. It can be transferred at death under the terms of a will. These transfers can convey the same outright ownership or the property can be transferred temporarily. Just how and to whom property is transferred are of prime importance in many cases. Here we get into a discussion of gifts and the taxation of gifts -- a complex and difficult area. The following examples are typical situations and will illustrate some of the complexities which must be considered.

Trusts are most commonly used to transfer ownership on a temporary basis. If the beneficiary interest is limited to the right to use the income from the property, this is an "income interest". This right can be terminated at any specified time, such as after a set number of years. Commonly, an income interest terminates at the death of the beneficiary; this is referred to as a "life estate". The property can then pass to another person, referred to as the "remainderman". In this case, the donor has made two separate gifts, a gift of the income interest and of the remainder interest.

Both direct and indirect transferes of property can also be considered as gifts. Two examples of such transfers are given below. The first is basically a direct transfer of property, although perhaps somewhat subtle. The second example is an indirect transfer which if not anticipated could cause financial problems.

Example 1: A man transfers property to a charitable institution under an agreement that annuities would be paid to his surviving wife and son during their lives. This constitutes a direct gift of the annuities in the amount of their present value at the time of the gift.

Example 2: A husband and wife use community property to purchase a life insurance policy on the husband's life with their daughter as the beneficiary. At the time of the husband's death, the wife is deemed to have made an indirect gift of one half of the value of the life insurance proceeds to their daughter.

One additional criterion of a transfer is that it must be complete. The donor must give up any power to redirect ownership of the property. An example of an incomplete transfer is the old Clifford Trust. Property was placed in trust for a limited period of time, after which ownership reverted to the original donor. No gift, under the gift tax rules, was given in this case.

If the donor gives up control of the property to someone else, i.e. a trustee, and does not reserve any power to change this decision, he has made a complete gift.

As an example, a donor transfers money into an irrevocable trust with an independent trustee. The trustee has the right to pay the income to the beneficiaries or to accumulate the income for a specified period of time. At the end of that time, all income and principle will be divided among the surviving beneficiaries. However, even though there is no guarantee that anyone will receive any distributions during the term of the trust or at its termination, a completed gift has been made. The donor did give up control of the assets.

A husband creates a trust giving a life estate to his wife and specifies that at her death the principle will be distributed to his daughter. He reserves the right to revoke the transfer with his daughter's consent. Should the transfer be revoked, the principle will revert to him. He cannot change the conditions without his daughter's consent. She is considered as having an adverse interest in the property, and, as such, he has given up control. The gift is complete.

This article has touched on just a very small portion of the complexities in estate planning. It is easy to see that without proper planning, a variety of difficult and potentially costly situations can develop. There is a major role for the accountant, because inevitably clients will need assistance. Our goal is to help them early and to prevent difficult financial situations.
COPYRIGHT 1990 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Schwartz, Marlyn A.
Publication:The National Public Accountant
Article Type:column
Date:Jun 1, 1990
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