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Trusts And Estate Planning | |
EFFECTS OF HOW TITLE IS HELD ON:__ TAX TREATMENT __ WHO INHERITS WHAT ASSET?
1. AN INDIVIDUAL IN HIS/HER NAMEExample: “Tom Jones, a Single Man” “Tom Jones, an Unmarried Man” “Tom Jones, a Married Man as His Sole and Separate Property” California law or decedent’s will or trust will determine who inherits an asset in the Individual’s own name, depending on whether or not the individual dies with or without a will. If the Individual who holds title in his/her own name is married, he/she may hold a particular asset either as Community Property or a “Married Man/Woman, as his/her sole and Separate Property”. In California if an asset is acquired during marriage, it is presumed to be Community Property, which means each spouse owns one half (1/2) of the asset. As such, if one spouse dies, the surviving spouse is entitled to one-half (1/2) of that asset and the deceased’s one-half (1/2) will pass accordingly to his/her will if one exists, or the California law which dictates who receives the deceased Spouse’s interest in that asset. However, there are two important exceptions to the Community Property presumption rule in which case the asset will be one spouse’s Sole and Separate Property:
Assets acquired by “Gift” or “Inheritance” by a married person and during marriage are the spouse’s sole and separate properties, which means the owner spouse may leave all of the assets to Others without leaving any portions to the surviving spouse. CAUTION : This rule concerning assets acquired by Gifts applies to the death only and the mere fact that title to an asset is held in one spouse’s name only as his/her separate property, may not determine ultimate ownership of that asset in the event of divorce or creditor’s claim. 2. TENANTS-IN-COMMON: This is the manner in which two or more Individuals may hold real property in equal or unequal portions. If any of the tenants in common dies, his/her interest in the property will pass according to his/her will and Not to the survivor tenant or tenants. Examples: (a) A, an Unmarried Man, and B, a Single Woman as Tenants in Common; (b) “A and B Husband and Wife as Joint Tenants as to an undivided ½ interest and C and D, Husband and Wife as Joint Tenants as to an undivided ½ interest, all as Tenants-in-common” In this example, as between A and B, they are Joint Tenants and if A dies B inherits the A’s ¼ interest. However, if B later dies, the entire A and B’s one half (1/2) interest will pass by B’s will, if any. CAUTION : Sharing ownership interest in a property with others directly impacts who inherits what in the event of death. 3. JOINT TENANTS: When two Individuals hold title to property as “Joint Tenants”, each owns a one-half (1/2) undivided interest in that property and when one of Joint Tenants dies, title passes to the survivor Joint Tenant. When three persons are Joint Tenants, each owns a one-third (1/3) interest in the property. If one of the three tenants dies, his/her 1/3 passes to the surviving two Joint Tenants regardless of who the intended beneficiaries of the deceased Joint Tenant may be. CAUTION : If A holds title as Joint Tenants with B who is not A’s intended beneficiary, upon A’s death, B will take title to A’s interest, even if A’s will names other persons as A’s beneficiaries. When a Joint tenant dies, the surviving Joint tenant records a certified copy of death certificate in order to pass title to property and to terminate Joint Tenancy. 4. COMMUNITY PROPERTY- HUSBAND AND WIFE: When Husband and Wife hold title to property as “Community Property”, they confirm that the nature of property is one-half (1/2) ownership by each spouse. In California, a spouse’s separate property acquired prior to marriage or acquired during marriage by Gift or Inheritance may be converted to the couple’s Community Property, if that is the intention of the owner of property. Of course, all properties acquired during marriage are considered “Community Property” generally, regardless of how title is taken. Upon death of a spouse, each of the deceased spouse’s one-half (1/2) interest in Community Property may pass by his/her will to others, and not necessarily to the other spouse. 5. AS TRUSTEE FOR SOMEONE ELSE No trust document must exist before an individual may hold title as trustee for another person. For instance, “A, Trustee for B”. However, this type of ownership cannot be used for securities or real property. It is simply a manner holding ownership of a bank account, savings and loan association or credit union. Upon A’s death, and only then, B will inherit the account without a court probate proceeding. Providing a certified copy of death certificate to the financial institution normally suffices to receive the bank account proceeds. 6. T.O.D. (TRANSFER ON DEATH) In the case of securities, such as stocks, bonds, and mutual funds and upon the security firm’s permission, it is possible to register securities in an individual name T.O.D. with a beneficiary designation. 7. P.O.D. (PAYABLE ON DEATH) This Type of registration applies to Banks, savings and loan, and credit union accounts, United States savings bonds and Vehicles Registration under the California Vehicle Code. For instance title may be taken in the name of “A, P.O.D., B”, which means upon A’s death, B will become owner of A’s account or vehicle. There is no court or probate proceedings necessary and this type of registration will bypass A’s will, if any. Like the “ Trustee Registration”, “P.O.D. Registration” cannot be used for securities or real property. ESTATE TAX TREATMENT OF JOINT TENANCY Joint Tenancy, T.O.D., or P.O.D. registration of an asset merely avoid probate upon the death of its owner. However, the entire value of the assets will be includible in the owner’s gross taxable estate for the purposes of Federal estate tax which is payable upon death. For instance, if A who owns 1,500,000 worth of assets, includes the names of his three children as Joint Tenants, even though A’s children will avoid probate proceedings upon A’s death, the entire value of 1,500,000 will be included in A’s taxable estate unless the children contributed assets to the Joint Tenancy. Joint Tenancy avoids probate but it does not avoid taxation at death. GIFT TAX TREATMENT OF JOINT TENANCYPlacing real property or securities into Joint Tenancy is considered a Completed Gift which subjects the asset transferred to Gift tax treatment. Normally, the Donor who makes the Gift is responsible for any Gift tax exposure. Federal law exempts the U.S. Citizen spouse from Gift taxation. In other words, married individuals may transfer unlimited amount of gifts between themselves and without incurring any gift tax as a result of those transfers. However, other than married couples, all other donors of gifts will be responsible for value of gifts made to each individual who receives the gift as Joint Tenant. Examples: Parents to children, siblings to other siblings. Example: Dad owns 100% of his home worth $900,000. He places the names of his two children as Joint Tenants with himself. Dad and each of his two children owns one third (1/3) of the Home equally. Dad is deemed to have made a gift of $600,000 to his children. Since each Individual is permitted to make a lifetime gifts in the amount of $1,000,000 Dad has used up $600,000.00 out of his $1,000,000 lifetime exemption for the gift of 2/3 of the Home to his children and therefore does not incur gift tax liability (provided that Dad has not made other gifts in the past). Current Gift tax laws allow total lifetime cumulative gifts of up to 1,000,000 per person without incurring gift tax liability. However, once the property is put in Joint Tenancy and a gift is made, each donee (Recipient) owns an undivided interest in the property. BAD NEWS WHEN A GIFT IS MADE TO A JOINT TENANT: Even though a gift, it will be ignored at death of Donor (original owner) and the entire asset will still be taxed for estate tax purposes when the original owner dies. However, this estate tax inclusion in the original owner treatment for the estate tax purposes, does not occur if the assets are instead placed in a Tenancy-In-Common, because the original owner is deemed to have made a gift on the proportionate share—e.g. an undivided 1/2 interest or an undivided 2/3 interest, etc. At death of the original owner (Donor), only the percentage of interest which is gifted will be included in his/her estate at his/her death. GIFTS BETWEEN MARRIED COUPLES: If a spouse changes title to his/her property which is on his/her own name as Separate Property into the couples’ Community Property, the transferor is deemed to have made a one-half (1/2) interest of value to his/her spouse. However, if the receiving spouse is a U.S. citizen, the spouse is exempt from gift taxation. REVIEW OWNERSHIP DOCUMENTS TO DETERMINE HOW TITLE IS HELDREAL PROPERTY:The Deed by which interest in property was acquired such as “Grant Deed” or “Quitclaim Deed” must be carefully reviewed in order to determine how title is held. All transfers and all Deeds must be reviewed. These deeds are recorded by the county Recorder where the real property is located. DEED OF TRUST: Where a debt exists in connection with a real property in California, the lender records a Deed of Trust in order to perfect its security interest in the property, which Deed operates as a lien against the property. STOCKS AND BONDS: Usually ownership of these securities is evidenced by Certificates. The Certificates state who owns title to the securities and if more than one individual, specify how title is held as between those individual, such as “JTWROS”: Joint Tenants with right of survivorship, “Tenants in Common”, or “ Community Property”. NOTES: Lender of a loan to a debtor, usually holds a “Promissory Note” which lists the debtor or debtors on the Note. If more than one debtor is listed on the Note, the relationship between them as to the manner of holding title must be stated: e.g. as Joint Tenants. MUTUAL FUNDS: Usually the periodic statement is the evidence of ownership and states how title is held if more than one owner owns the shares held in the mutual fund. UNITED STATES TREASURY OBLIGATIONS: Such as United States Treasury bills, Notes, and Bonds. They can be purchased and held by a bank or brokerage firm, or they may be purchased through a “Treasury Direct Account” which issues a periodic statement. The statements indicate how title is held. If the term “or” is used, it indicates Joint Tenancy. UNITED STATES SAVINGS BONDS: Refer to the E, H, EE, and HH bonds. These can be registered on the name no more than two (2) persons, or may name a P.O.D. beneficiary. The term “or” indicates Joint Tenancy. LIMITED PARTNERSHIP: A “Limited Partnership” may issue “Limited Partnership Certificates” or the partnership interests may be reflected on the partnership records or the annual income tax returns issued by the partnership as reflected on the IRS “K-1” Forms. VEHICLES: In California, the term “Vehicles” refers to automobiles, RVs, motorcycles, trailers, trucks, boats, etc. The certificate of ownership shows the manner of holding title. v If the term “or” appears then the vehicle is held in Joint Tenancy. v If the term “and” is used or there is a slash (/), it means title is held as Tenants in Common and each owner owns an equal share in the vehicle. v If it is registered as a “P.O.D.” the designated beneficiary will inherit the “Vehicle” upon the Owner’s death.
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LAW OFFICES OF MIKE S. MANESH
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