Bryant - Course 6. Estate Planning. 2. Forms of Property Ownership

Question 1

Module Introduction

History bears testimony to the fact that property is not and has never been a natural phenomenon. As a matter of fact, occupancy was the key, according to which the “no man’s goods” of the primitive world were labeled as the private property of individuals. This transition was a landmark in world history. Property was yet another creation of man in the interest of convenience and order. Admittedly, it has its merits, but property, especially in the landed form, must qualify as the biggest cause for strife, since the beginning of civilization.

But today, property or assets must qualify as one of the most important yardsticks for measuring economic success. Property ownership comes in many forms, with each form designed to address a specific need of the property owner.

The Forms of Property Ownership module, which should take approximately four hours to complete, will explain the different types of property ownership in the U. S.

Answer 1

Upon completion of this module you should be able to:
* Describe different types of property ownership.
* Explain the advantages and disadvantages of property ownership forms.
* Explain asset classification.
* Understand management in community property.
* Compare the different kinds of property ownership.
* Identify tax consequences associated with the various property ownership forms.
* Explain the estate planning impact of each form of asset ownership.

Question 2

Module Overview

Each of these forms of property ownership satisfies specific objectives related to estate planning and non-estate matters.

For example, there are different income, estate, and gift tax implications for all these forms of ownership.

The challenge for the financial planner lies in understanding the impact of property ownership on the successful implementation of the estate plan.

In the data-gathering process, the planner should determine the nature of all property owned by the client, how property titles are held, and the identities of any additional owners or beneficiaries designated in contracts such as life insurance policies, annuities, and retirement plans.

Community property ownership is in use in only nine states in the US. As a result, the rules for community property are state-specific and, therefore, may significantly impact the estate plan depending on the location of the client’s home.

Answer 2

To ensure that you have an understanding of forms of property ownership, the following lessons will be covered in this module:
* Individual or Separate Ownership
* Joint Tenancy with Right to Survivorship
* Tenancy by the Entirety
* Tenancy in Common
* Life Estate
* Community Property

Exam Tip: For each property ownership title, be able to identify the following characteristics:
* The number and type(s) of owners
* Whether the owner(s) can transfer property
* Presence of survivorship rights
* Inclusion in the probate estate
* Inclusion in the gross estate

Question 3

Sections

• Individual or Separate Ownership
• Joint Tenancy with Right to Survivorship
• Tenancy by the Entirety
• Tenancy in Common
• Life Estate
• Community Property

Answer 3

Exam Tip: For each property ownership title, be able to identify the following characteristics:
* The number and type(s) of owners
* Whether the owner(s) can transfer property
* Presence of survivorship rights
* Inclusion in the probate estate
* Inclusion in the gross estate

Question 4

Section 1 - Individual or Separate Ownership

Describe characteristics of Individual or Separate Ownership

Answer 4

The primary characteristic of property held in sole ownership, also known as fee simple property or separately owned property, is that the owner has absolute ownership and control of the property. This means that if the owner wishes to sell it or make a lifetime gift of the property to someone else, the owner has an absolute, unqualified right to do so.

As the sole owner of the property, the owner controls the asset until the date of death. The sole owner has the right to transfer the property to anyone he or she chooses through the provisions of the owner’s will.

As a result, individually owned assets transferred under the provisions of a will are probate assets.
If the owner does not have a will, the laws of intestacy in the state of the decedent’s residence will determine to whom the separately owned assets will transfer. These assets are still probate assets.

To avoid probate after death, the owner may transfer the individually owned property into a revocable living trust.

Both lifetime control and postmortem control of property are characteristics of property held in sole ownership. As a result, the property owner has the right to control this asset fully.

Separate IRA Ownership Example:

As their name suggests, IRAs (Individual Retirement Accounts) are a type of single-owner account. Therefore, all investment decisions for the assets held in an IRA require the owner’s approval. Neither spouses nor beneficiaries should be able to make decisions on the account unless legally given the power to do so.

Question 5

What percentage of separately-owned assets value on the date of death will be included in the owner’s gross estate after death?
* 100%
* 10%
* 50%
* 80%

Answer 5

100%

• 100% of the assets value on the date of death will be included in the owner’s gross estate after death.

Question 6

What are the disadvantages of being a single owner?

Answer 6

Liabilities
The downside of being a single owner of a property is that the liabilities are solely your responsibility. For example, if someone slips and falls on your property, you are responsible for any resulting liability. Adequate property insurance planning may be able to prevent unforeseen liabilities.

Liabilities from creditors are the responsibility of the single owner as well. Owners must make debt payments on the property, such as mortgage payments. Failure to pay off debts could result in creditors placing a claim (lien) on the property or forcing the owner to sell (levy) the property to meet debt payments.

Financial assets held as single ownership are exposed to any of the owners’ liabilities.

Question 7

Describe Tax Consequences of Individual or Separate Ownership

Answer 7

With individually owned property, it is presumed that the owner has actual and/or constructive receipt of any income generated from the asset and has the power and control over the property to determine who will receive its benefits. Therefore, all of the income produced from the property is taxable to the owner.

The owner is responsible for paying taxes when purchasing the property, owning the property when the property yields an income, and when transferring the property to someone else:
* For real property, single owners must pay property taxes and income taxes for any income generated from the property.
* For financial assets, the owner is responsible for taxes on any dividends, interest income, and capital gains.
* Losses from the sale of a property can be used as a credit against capital gain.

If the owner of an individually owned property chooses to gift the income to a non-owner, and even if income is generated before making the gift, the asset’s owner will be subject to potential gift tax liability on the amount of the transfer.
* If the amount in question exceeds the annual exclusion amount, the owner will have to use his or her applicable credit (i.e., $5,311,800 in 2023) amount to absorb the gift tax liability on the amount of the taxable gift.

The entire amount of the individually owned property will be included in the owner’s gross estate for estate tax purposes. Unless some special valuation technique is used, such as alternate valuation or special use valuation, the includible value of the individually, or separately-owned property will be its fair market value as of the date of the owner’s death.

Question 8

Describe how Property Transfers at Death with Individual or Separate Ownership

Answer 8

• If the individual owner of the asset is married, regardless of the provisions within the will, the surviving spouse may be entitled to a minimum share of the decedent’s estate. This right is afforded to a spouse under the state’s “elective share” statutes.
• These statutes are specific to the decedent’s state of residence. Therefore, the percentage of the decedent’s estate to which a surviving spouse may be entitled may vary by state.
• In any event, to the extent the decedent does not leave the state’s minimum to the surviving spouse, he or she may “elect” against the will in order to receive his or her legally required share of the assets.
• A valid pre-nuptial agreement will supersede state statutes such as the elective share statute, therefore the surviving spouse would not be permitted to “elect” against the will.

Therefore, if the sole owner wants to guarantee the transfer of the property to a specific individual other than the surviving spouse, depending on state law, proper planning may suggest that the sole owner convert the property into joint tenancy with the right of survivorship with the specific individual at some point in the sole owner’s lifetime.
* Otherwise, an individual who has left the solely owned property under the terms of the will could unexpectedly have the property taken by the surviving spouse, since many elective share statutes disrupt the testamentary plans of the owner of the solely held property.
* However, the elective share statutes may encompass all of the decedent’s assets so the planner has to be familiar with state law before any title changes occur.

If the individual owner dies without a will, the individual property will pass to the decedent’s heirs, according to the laws of intestate succession, also known as the laws of intestacy.
* Each state has its own laws of intestacy. These statutes determine to whom the decedent’s property will pass and the amount.

Should the decedent die without a will and without living heirs or designated beneficiaries, the property will escheat to the state. This effectively means that the state of the decedent’s residence becomes the heir to all of the decedent’s assets. Therefore, if the individual owner of property wants control over the ultimate heirs of the separately owned assets, a will should be executed.

Certain types of separately owned assets can automatically transfer to an heir upon the owner’s death. These assets include beneficiary designation assets such as life insurance, retirement plans, and securities (only in those states with payable on death or POD statutes).
* Generally, these types of assets, although separately owned, do not transfer under the provisions of a will.

As administrative expenses and attorney’s fees are frequently calculated as a specific percentage of the decedent’s probate estate, the fact that the decedent was the individual owner of a sizeable amount of property may cause these expenses to be greater than they would be if the property were held in some form of joint tenancy or, as a beneficiary designation asset, or as a separately-owned asset within a revocable trust. Therefore, if the owner of individually owned property wants to ensure that these expenses are reduced, it may be suggested that the property not be owned as an individually- or separately-owned asset.

Practitioner Advice:
* It is essential to differentiate between probate expenses and estate taxes.
* Separate property and property titled as Tenancy in Common are transferred to others by Will. Consequently, the property is subject to probate expenses and estate taxes.
* Other forms of property ownership, such as Joint Tenancy With Right of Survivorship (JTWROS) and Tenancy by the Entirety (TE) avoid probate because they pass automatically to others by the operation of law.
* However, they are subject to estate taxes in the property owner’s estate.

Question 9

Which types of property ownership are probate substitutes?

Answer 9

Administrative expenses and attorney’s fees are commonly calculated as a specific percentage of the decedent’s probate estate. The fact that the decedent is the sole owner of a sizeable amount of property may cause these expenses to be greater than they would be if the property were held in some form of joint tenancy or as a beneficiary designation asset, or as a separate asset within a revocable trust.

Therefore, if minimizing the time and expense associated with probate is a planning objective, property should be owned in a manner which affords a probate substitute.

For example, assets jointly owned with rights of survivorship, assets transferring under a beneficiary designation, and assets owned within a trust prior to death, are probate substitutes.

However, proper estate planning may also mean reducing estate taxes. Not all probate substitute assets will afford your client this result. Do not let the probate tail wag the tax dog.

Question 10

Each of the following are a type of property ownership that avoids probate EXCEPT:
* Individually-owned car, titled to the decedent.
* Jointly-owned assets with rights of survivorship.
* Assets transferring under a beneficiary designation.
* Assets owned within a trust prior to death.

Answer 10

Individually-owned car, titled to the decedent.

• All of these except an individually-owned car, titled to the decedent will avoid probate.

Question 11

What are the Advantages of Individually Owned Assets?

Answer 11

Assets that are individually or separately owned provide advantages that no other form of ownership provides.

Advantages of Individually Owned Assets:
* The simplest form of property ownership.
* Provides the owner with absolute control over the property. The owner can sell, gift, convey, or pledge the property without the consent of other individuals.
* The asset owner can reap any financial benefits associated with the property (i.e., rental income).
* The individually-owned asset is generally only attachable by the creditors of the owner of the asset.
* Allows the client and the planner to create an estate plan that can minimize tax liability.

Question 12

Section 1 - Individual or Separate Ownership Summary

Property owned as a single owner gives the owner complete control over the property. Single owners do not need to share decision-making with others on the property’s purchase, sale, or transfer. This freedom comes with the price of having to bear all burdens of liabilities, being responsible for taxes, and dealing with the complicated process of ownership transfer upon death.

In this lesson, we have covered the following:
* Separate Ownership: Single owner has complete lifetime and testamentary control over the property.
* Liabilities: Single owner bears all liabilities of the property. These liabilities include debts, expenses, taxes, etc. Failure to make payments can result in debtors forcing owners to sell the property to pay debts.

Answer 12

• Tax Consequences: Single owners are responsible for paying all the taxes associated with the property. Real property may have excise taxes, while financial assets may have income or capital gains taxes associated with various transactions. A gift of the income or the property itself from an owner to a non-owner would result in a potential gift tax liability on the transfer amount.
• Property Transfer at Death: Individually owned assets must pass to heirs by a Will or through intestacy. This property is subject to probate.
• Probate Property: The costs associated with probate range from 1-6% of the property’s value. Probate can be avoided by jointly held property, beneficiary designations in contracts and pensions, and property placed into revocable or irrevocable trusts.
• Advantages of individually owned assets: There are several advantages to this form of property ownership, such as ease of ownership, the owner controls property, the owner reaps financial gains, minimizes owner’s estate tax by using the unified credit amount to offset estate tax liability, and limits creditor liability to the owner, not others.

Question 13

After a divorce, Cecilia opened an account for herself at a local bank under her own name. She became afraid that her ex-husband would be able to access her account without her approval. Which of the following points would you make to Cecilia to clarify how her single account works? (Select all that apply)
* Cecilia should be worried about her ex-husband gaining access to her account
* The bank should not perform any transactions without Cecilia’s approval
* Someone whom she granted permission to through power of attorney can make transactions from her account
* Cecilia’s ex-husband has equal ownership to her account

Answer 13

The bank should not perform any transactions without Cecilia’s approval

Someone whom she granted permission to through power of attorney can make transactions from her account

• One benefit to owning assets as a single owner is the ability to maintain sole control over the assets. Cecilia is the only person who can request transactions for the account. If she grants the power of attorney to someone, that person will have the authority to make transaction requests on her behalf.

Question 14

Cecilia owns her home as a single owner. She is also a sole proprietor of a business that defaulted on its debt. What can the creditors do to Cecilia? (Select all that apply)
* Force her to liquidate the home to pay off the debt
* Nothing to her property
* Place a claim on her home

Answer 14

Force her to liquidate the home to pay off the debt
Place a claim on her home

• If Cecilia defaults on her loans, the creditors may levy or place a lien on property owned by her or property she owns as joint tenants with others.

Question 15

Which of the following financial planning components can help with the transferring of Cecilia’s property held as single ownership in the event that she passes away?
* Investment Planning
* Insurance Planning
* Retirement Planning
* Tax Planning
* Estate Planning

Answer 15

Estate Planning
* Estate planning will help Cecilia make the right decisions about her property ownership in preparing for the transfer of her assets upon death. The other components of financial planning will support other financial decisions.

Question 16

Section 2 - Joint Tenancy with Right of Survivorship

Describe Joint Tenancy with Right of Survivorship when owners are married

Answer 16

Joint tenancy with rights of survivorship (JTWROS) is a type of property ownership involving two or more people.
* All of the owners control an asset that is jointly owned with rights of survivorship during their lifetime.
* Upon the death of one of the owners, the decedent’s interest in the jointly owned property will automatically transfer to the surviving owner.
* Therefore, when an asset is jointly owned with rights of survivorship, a will does not transfer the decedent’s interest in the property, the law does.

Spouses or non-spouses may own property that is titled JTWROS. Regardless of whom the joint owners are, the decedent’s interest will automatically transfer to the surviving owner.

From an estate tax perspective, whether or not the property owners are spouses will have a tremendous impact on the calculation of the estate tax liability. Specifically, under Internal Revenue Code Section 2040(b)(1), only one-half the value of assets jointly owned rights of survivorship between spouses will be included in the decedent’s gross estate.

This property will also qualify for unlimited marital deduction because it passes to the surviving spouse (as long as the surviving spouse is a U.S. citizen).
* As a result, the first spouse’s estate should face no estate tax liability on such property, even though one-half the value of the jointly held property is included in the decedent’s gross estate.
* The surviving spouse’s gross estate will include the entire property value. However, unless the surviving spouse remarries, his or her estate will not benefit from the unlimited marital deduction. As a result, an estate tax may be due.

• When an individually-owned asset is changed to a right of survivorship asset and the joint owner is a spouse, no gift tax liability will ever result (unless the spouse is a non-U.S. citizen) because of the unlimited marital deduction for gift tax purposes.
• However, if the new owner is a non-spouse, and the property is cash or securities, no gift is made upon the creation of the JTWROS account.
• However, if the non-spouse joint owner takes a withdrawal from the account, the value of the withdrawal will constitute a gift.
• If the property is real estate, the contribution rule applies to gift tax purposes.

Question 17

Describe Joint Tenancy with Right of Survivorship with non-married joint owners

Answer 17

The rule is different for non-married joint owners.
* Upon the first owner’s death, the IRS assumes that the decedent made a 100% contribution toward the asset’s purchase.
* Unless the surviving owner can prove an actual contribution toward the purchase of the asset, 100% of the value of the jointly owned asset will be included in the decedent owner’s estate.
* This is known as the fractional interest rule.
* This rule provides when the surviving non-spouse owner of a jointly owned asset can prove contribution toward the purchase of the asset, only the value of the property correlating to the decedent’s original contribution will be included in the decedent’s gross estate.

Question 18

Example (Fractional Intrest Rule)

An asset worth $100,000 is acquired by A and B, who are not married, and title the property JTWROS. A pays $25,000 toward the property, or 25%, and B pays $75,000 for the property or 75%. Upon A’s death 10 years later, the property’s value is $1 million.
* Since A and B are non-spouse joint property owners, how much will be included in A’s gross estate?
* However, since B can prove that he contributed 75% toward the purchase of the property, only __ ____??____ __ will be included in A’s estate.

Answer 18

An asset worth $100,000 is acquired by A and B, who are not married, and title the property JTWROS. A pays $25,000 toward the property, or 25%, and B pays $75,000 for the property or 75%. Upon A’s death 10 years later, the property’s value is $1 million.
* Since A and B are non-spouse joint property owners, $1 million will be included in A’s gross estate.
* However, since B can prove that he contributed 75% toward the purchase of the property, only 25% of the $1 million asset, or $250,000, will be included in A’s estate.

Question 19

Describe 3 Main Characteristics of JTWROS

Answer 19

The primary characteristics of property held jointly with rights of survivorship are as follows:
* Several owners share property. While the typical case has two owners, the property held jointly may have three or more owners.
* This creates a situation where the lifetime control of the property is divided among all of the owners. In other words, the control, ownership, and enjoyment of the property are shared equally by all of the joint tenants.

For example, any income from income-producing property that is titled JTWROS will be split equally among all of the joint tenants. If the property produces an annual income of $18,000 and is owned by two joint tenants, each tenant will report income of $9,000.
* While this would be of no consequence to a husband and wife who file a joint income tax return, this could be an effective means of splitting/shifting income between joint tenants who are not married.

Survivorship feature. Upon the first owner’s death, the property immediately passes to the surviving owner(s), in equal shares. Thus, if there is only one surviving owner, the surviving owner becomes the owner of the entire interest of the asset. As a result, the first owner cannot control who will receive his or her interest in the property. The automatic survivorship feature of JTWROS means that the decedent’s interest in the property is not governed by the terms of his or her will. Instead, such property passes automatically to the surviving owner(s) regardless of the terms of the will.

Exclusion from the probate estate. The survivorship feature of JTWROS property causes the property to be excluded from the decedent’s probate estate. Thus, if an individual wants to transfer the property outside of probate, the asset should be owned JTWROS. However, keep in mind that by minimizing the probate expenses, we may not be given an opportunity to minimize estate tax.

Question 20

Describe Basis in JTWROS

Answer 20

Regardless of whether the property is jointly owned between spouses or non-spouses, only the value of the asset included in the decedent’s estate will receive a step-up in basis.
Basis is determined by fair market values (FMV) at the date of the property owner’s death.

Calculation of the step-up amount, however, differs between spousal JTWROS property and JTWROS property owned by non-spouses.

Question 21

Example (Basis Calculation: Spousal JTWROS Property)

A husband and wife bought a country home together for $80,000 and titled the property JTWROS. The husband paid 80% or $64,000, and the wife paid 20% or $16,000. Although each paid different amounts, the spousal property is treated as equally owned.
* As a result, both husband and wife have an original basis of __ ____??____ __.

When the husband died in the current year, the country home was valued at $200,000. The husband’s gross estate included 50% of $200,000 or $100,000.
The wife received his husband’s spousal JTWROS share of the property and now has sole ownership of 100% of the property.
* The wife’s new basis is __ ____??____ __.

Answer 21

A husband and wife bought a country home together for $80,000 and titled the property JTWROS. The husband paid 80% or $64,000, and the wife paid 20% or $16,000. Although each paid different amounts, the spousal property is treated as equally owned.
* As a result, both husband and wife have an original basis of $40,000 ($80,000 (original purchase) x 0.50)).

When the husband died in the current year, the country home was valued at $200,000. The husband’s gross estate included 50% of $200,000 or $100,000.
The wife received his husband’s spousal JTWROS share of the property and now has sole ownership of 100% of the property.
* The wife’s new basis is $140,000, based on her original basis of $40,000 plus her husband’s share of property that was stepped-up in basis to $100,000.

Wife’s Original Basis $40,000 Husband’s Step-Up Basis $100,000
Wife’s New Basis $140,000

Question 22

Example (Basis Calculation: Non-spousal JTWROS Property)

A father and son bought a vacant lot together for $80,000 and titled the property JTWROS. The father paid 80% or $64,000 and the son paid 20% or $16,000.
* Here, each party’s original basis is calculated based on the percentage of their contribution (80% for the father, 20% for the son).
* When the father died in 2020 the lot was valued at $200,000. The father’s gross estate included __ ____??____ __.

The son received his father’s non-spousal JTWROS share of the property and now has sole ownership of 100% of the property.
* The son’s new basis is __ ____??____ __.

Answer 22

A father and son bought a vacant lot together for $80,000 and titled the property JTWROS. The father paid 80% or $64,000 and the son paid 20% or $16,000.
* Here, each party’s original basis is calculated based on the percentage of their contribution (80% for the father, 20% for the son).
* When the father died in 2020 the lot was valued at $200,000. The father’s gross estate included 80% of $200,000 or $160,000.
The son received his father’s non-spousal JTWROS share of the property and now has sole ownership of 100% of the property.
* The son’s new basis is $176,000, based on his original basis of $16,000 plus his father’s share of property that was stepped-up in basis to $160,000.

Son’s Original Basis $16,000
Father’s Step-Up Basis $160,000
Son’s New Basis $176,000

Question 23

Describe Avoiding Adverse Tax Consequences in JTROWS

Answer 23

As previously noted, the estate tax implications of holding property jointly with right of survivorship are complicated.

In order to prove contribution toward the purchase of the property, accurate records must be kept by all of the tenants, including the amount of their original contribution and the cost of any additional improvements born by each of the tenants.
Since it is not possible to know who will die first, it is prudent for all of the joint owners to keep these records in order to protect the interests of all tenants.

Joint tenants such as parent and child, partner and partner, or non-spousal joint tenants need to remember that the joint tenancy status of the property does not automatically result in the inclusion of only one-half the amount of the joint tenancy property in the decedent’s gross estate.

Question 24

According to IRC Section 2040(a), except for joint tenants who are married, unless the surviving owner can prove contribution toward the purchase of the asset, what percentage value of jointly held property will be included in the gross estate if the first owners die?
* 100%
* 50%
* 20%
* 80%

Answer 24

100%

• Unless the surviving owner can prove contribution toward the purchase of the asset, 100% of jointly held property will be included in the gross estate if the first owners die.

Question 25

When is Joint Tenancy Appropriate?

Answer 25

Although there are no hard and fast rules regarding the appropriateness of titling, the following circumstances indicate that holding property jointly with rights of survivorship may be a good selection: * **To ensure that the property automatically passes to a specific individual upon the owner's death**. If the property is held jointly with rights of survivorship, the title passes to the surviving owner immediately upon the first owner's death. * **To avoid probate**. Joint tenancy property bypasses the probate process. This means **title vests immediately in the survivor**. There are **no time delays, administrative costs or legal fees associated with the property transfer to the surviving joint tenant**. * **To reduce administrative costs and attorney's fees**. The use of joint tenancy can be effective since these fees are often calculated as a percentage of the probate estate. * **To minimize income tax liability**. This can be achieved by splitting the income with other joint tenants, with resultant tax savings for each joint tenant, instead of having all of the income reported by a sole owner.

Question 26

What are the disadvantages of jointly-held property?

Answer 26

* Creditors can reach a joint tenant's undivided interest. * **A spouse's unified credit can only be used to offset estate taxes for the solely owned property, not for assets titled JTWROS**. * If one joint tenant becomes incapacitated, his share of joint property is not accessible to the other joint tenant unless the other joint tenant has a durable power of attorney or is appointed guardian or conservator by the probate court. * **Exceptions are joint bank accounts and securities held in street name**. * A decedent joint tenant's estate may have a liquidity problem since the JT property passed directly to the other joint tenant and is not available to the decedent's estate to pay for taxes, debts, or expenses.

Question 27

Describe Ownership Termination in JTWROS

Answer 27

It is easy to terminate a property interest that is owned as JTWROS. The joint tenancy may be terminated unilaterally by any one of the joint tenants. This causes a severance of the characteristics of joint tenancy property, such as an undivided interest in the entire property. Owners of assets that are jointly owned with rights of survivorship acquire the same interest in the same property at the same time and normally take possession simultaneously. **The severance of a joint tenancy does not require the consent of all of the joint tenants**. * For example, **joint tenancy property can be converted to tenancy in common by one joint tenant, without the consent of other joint tenants, to terminate the interest**. * **However, as a practical matter, it is always prudent to obtain the signature of the non-consenting joint tenant(s), on, for example, a deed transfer form, especially if the joint tenants are spouses. This could prevent the non-consenting joint tenant from asserting survivorship rights in the property sold to a third party. The only way to nullify these rights is by obtaining the consent of all of the joint owners of the asset**. **A person's creditors may force a sale of property held in joint tenancy to satisfy an unpaid judgment**. The consent of the remaining joint tenants is not necessary to sever the joint tenancy in this manner. Upon the death of a joint tenant, creditors may not lay claims to the portion of the property that has been passed on to the other joint tenants through rights of survivorship.

Question 28

# Practitioner Advice: Joint tenancy can present problems. * Sometimes, a co-owner can dispose of the property without the financial planner's knowledge or consent. * Consequently, consent of the co-owner may be needed before entering a transaction. * This can only make problems worse in troubled marriages or between divorced partners. * Furthermore, joint tenancy makes one's interest in the property liable for claims on the co-owner. * When one of the owners is engaged in a business with potential liabilities, joint tenancy should be avoided.

Question 29

# Section Summary **Property titled as JTWROS can be owned between spouses and non-spouses, with each JT owning equal interests in the income (if any) and the property**. In this lesson, we have covered the following: **JTWROS**: With property held as JTWROS between spouses **½ of the FMV of the property is included in the decedent JT's estate**. This ½ **gets a marital deduction**. Property held as J**TWROS with non-spouses is subject to the fractional interest rule in the decedent JT's estate, based on their contribution to the original purchase price**. This **property is not subject to an estate tax but it will be included in the decedent's estate**. **Primary Characteristics**: JTWROS property **passes automatically by operation of law to the surviving JT**. No will is needed to pass property to others, therefore, **property titled JTWROS avoids probate**. **When JTWROS is Appropriate**: Advantages of property titled as JTWROS include **ownership transfer occurring immediately at death**, **avoidance of probate**, **avoidance of transfer fees**, and **splitting of income for income tax purposes**. **Ownership Termination**: JTWROS property **can be terminated by one JT to form a Tenancy in Common without the consent of the other JT**.

Question 30

Jennifer, Michelle, Tom and Heather own a summer home as joint tenants. Tom passes away. Who will receive Tom's interest in the summer home? (Select all that apply) * Tom's Estate * Jennifer * Michelle * Heather

Answer 30

Jennifer Michelle Heather * Joint tenant ownership comes with the right of survivorship. This means that in the event that one of the owners passes away, the other surviving owners of the property would receive the decedent's interest. * In this case, Jennifer, Heather and Michelle would receive Tom's JT interest in property that was included in his estate.

Question 31

Rob and Mary, who are cousins, bought property together two years ago for $80,000. Rob paid $60,000 and Mary paid $20,000. When Rob died last month, the FMV of the property was worth $120,000. What amount was included in his gross estate? * $30,000 * $60,000 * $80,000 * $90,000

Answer 31

$90,000 * $90,000 is included in his gross estate based on the fractional interest rule. Since Rob contributed ¾ of the original purchase price, then ¾ of the FMV of the property, or $90,000 is included in his gross estate.

Question 32

Descibe the Stepped-up Basis in Tenancy by the Entirety

Answer 32

Stepped-up Basis **Property that spouses own as JTWROS or as Tenancy by the Entirety will receive a stepped-up basis in the decedent's ½ of the property that is included in the gross estate.** The surviving spouse will acquire the decedent's new stepped-up basis, but they will not receive a step-up in basis for their ½ share of the property they own.

Question 33

# Example (Stepped-up Basis) A husband and wife bought a home for $200,000. The husband paid 75% or $150,000, and the wife paid 25% or $50,000. When the husband died in the current year, the home was valued at $400,000, and ½ of the property, or $200,000 was included in his gross estate. * His wife received his stepped-up basis of $__ ____??____ __ which is added to her original basis in the property. * Although she only paid 25% when they acquired the property, each spouse is considered to own an equal ½ share. Therefore, her original basis at acquisition was $__ ____??____ __ and her new basis in the property is $__ ____??____ __.

Answer 33

A husband and wife bought a home for $200,000. The husband paid 75% or $150,000, and the wife paid 25% or $50,000. When the husband died in the current year, the home was valued at $400,000, and ½ of the property, or $200,000 was included in his gross estate. * His wife received his stepped-up basis of $200,000 which is added to her original basis in the property. * Although she only paid 25% when they acquired the property, each spouse is considered to own an equal ½ share. Therefore, her original basis at acquisition was $100,000 and her new basis in the property is $300,000.

Question 34

A mother re-titles the deed to her home as JTWROS with her son. What are the consequences of this action? (Select all that apply) * The mother made a gift of ½ of her home to her son. * When the mother dies, 100% of the FMV of the home will be included in her estate, but she can use her unified credit amount to offset up to $5,311,800 in value, in 2023. * If the mother becomes incompetent, her son can sell the home to pay for her medical care. * If the mother is sued, her creditors cannot reach her son's JT interest. * When the mother dies, her executor cannot sell the house to pay her estate taxes but a unified credit of $5,311,800 is available to offset up to $12,920,000 in estate taxes.

Answer 34

The mother made a gift of ½ of her home to her son. When the mother dies, 100% of the FMV of the home will be included in her estate, but she can use her unified credit amount to offset up to $5,311,800 in value, in 2023. When the mother dies, her executor cannot sell the house to pay her estate taxes but a unified credit of $5,311,800 is available to offset up to $12,920,000 in estate taxes. * The mother made a gift of ½ of the FMV of her house to her son when she gave him ownership of the property. * **If she is sued, creditors can place a lien on the home and reach her son's interest**. * If she becomes incompetent, her son cannot sell her JT interest in the home without obtaining court approval. * **When the mother dies, the house passes automatically to her son and is not available to her estate**. * **The full FMV of the home will be included in her estate but is offset by her unified credit amount**. * **The son will receive a full step-up in basis at her death**.

Question 35

Community Property Separately Owned Money earned by either spouse, post-marriage Property acquired by either spouse prior to marriage Property purchased by either spouse, post-marriage Gifts to an individual spouse while married. Commingled separately owned assets and community property assets Inherited assets bequeathed to either spouse, individually, while married.

Question 36

# Section 3 - Tenancy By the Entirety Describe Tenancy By the Entirety

Answer 36

Tenancy By the Entirety A **tenancy by the entirety is a specialized form of joint tenancy with right of survivorship existing between co-tenants who are spouses**. * The estate is **based on the common law concept of "spousal unity" - that the two spouses are one person**. * Common law, therefore, dictates that a transfer of property to the spouses results in only one estate, an entirety. In this estate, the spouses own the whole interest collectively, but no undivided individual share. * With the modern erosion of the concept that spouses are one, **most states have abolished tenancy by the entirety**. * In states that still retain this form, **spouses usually possess equal rights in controlling and enjoying the property**. **The survivorship feature that is characteristic of joint tenancy property is also found in tenancy by the entirety**. * Upon the first spouse's death, the **property automatically passes to the surviving spouse without a will and outside of the probate process**.

Question 37

Describe Reverse Gift

Answer 37

Reverse Gift **A person with a low basis in property, such as stock, may want to gift their appreciated property to someone who is dying, to receive the property back with a new step-up in basis when the donee dies**. * **However, this tactic will not work if the decedent received the property from the donor within one year of death**. * In that case, the basis in the gifted property will not be stepped up to its date of death value and the donor will retain their original adjusted basis in the property. * This amount could include the original basis plus any gift taxes the donor paid on the transfer. * The property is includible in the donee's gross estate and the donor's gross estate at the date of death FMV. **This transfer will work if the decedent lives for more than one year after receiving the gift, or if the gifted property is bequeathed to anyone other than the original donor or the donor's spouse**. * **In these two situations, the transferred property would receive a stepped-up basis in the decedent spouse's estate for the property's fair market value**.

Question 38

Describe Characteristics of Tenancy By the Entirety

Answer 38

Characteristics of Tenancy By the Entirety Property held in tenancy by the entirety differs from joint tenancy property in two significant aspects: * **Only husband and wife may hold the-idered a disadvantage, especially if one of the spouses needed to sell his or her one-half interest to generate revenue or cash for various reasons.** * **Property held in tenancy by the entirety can only be severed with both spouses' consent or by divorce**. **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**. For example, Alex and Jenny hold property in a tenancy by the entirety. Alex makes a deed that purports to transfer his interest in the property to John. Jenny does not join in this deed. After that, Alex dies. Jenny now has full title to the property, while John has nothing. Presumably, this protection could make the property's value higher than it would be if either joint tenant could unilaterally sever the joint tenancy and transfer the property to a third party. At the same time, **this inability to sever the property without the other spouse's consent could be considered a disadvantage, especially if one of the spouses needed to sell his or her one-half interest to generate revenue or cash for various reasons**. Tenancy by the entirety **offers limited protection from creditors as well**. * **If one spouse defaults on debts and creditors are seeking compensation, the most the creditor can do is put a lien (claim of property if it is sold or until debt is paid off) on the property**. * **This protection is not afforded with property titled JTWROS**. * However, **creditors can satisfy judgments for debts that are attributed to both spouses**.

Question 39

# Practitioner Advice: **An alternative available to protect property for married owners from creditors is the Homestead Act**. Some states adopted this law to **encourage the development of abandoned real estate**. Others have adopted it as **property tax relief or special tax considerations**. For example, if a married couple over age 62 registers their home for homestead exemption in Massachusetts, they can protect up to $500,000 each of home equity from certain creditors. Each time the owners refinance or take out a home equity loan, they must re-file the property for the homestead exemption.

Answer 39

A client can check with a real estate broker or attorney to see if the homestead exemption is available in his or her state.

Question 40

John Nash and his wife Susan Nash are joint owners of a property. Susan can terminate the ownership without John's permission. * False * True

Answer 40

True * **The joint property law does not require the consent of all joint tenants before termination**. * **One JT can change property to tenants in common without the other JT's consent**. * **For property owned as JTWROS between spouses, it's a good idea to get the spouse's signature on a deed transfer form to avoid having the JT spouse assert survivorship rights on property sold to a third party**.

Question 41

# Example (Reverse Gift) Chris gifts stock worth $80,000 to his dying wife Elaine, which has a basis of $20,000. * If Elaine dies 10 months later, the stock will not get a step-up in basis, unless __ ____??____ __. * If Elaine dies 14 months later, the stock bequeathed to Chris would receive a step-up in basis to FMV at Elaine's death.

Answer 41

Chris gifts stock worth $80,000 to his dying wife Elaine, which has a basis of $20,000. * If Elaine dies 10 months later, the stock will not get a step-up in basis, unless she bequeaths the stock to someone other than Chris. * If Elaine dies 14 months later, the stock bequeathed to Chris would receive a step-up in basis to FMV at Elaine's death.

Question 42

# Section Three Summary In this lesson, we have covered the following: * **Tenancy by the entirety**: A form of property ownership **similar to JTWROS but only owned between husband and wife**. * **Characteristics of tenancy by the entirety**: Property interests cannot be severed by one spouse. **Limited creditor protection is provided for claims against one spouse, but property may be attached by joint creditors**.

Answer 42

* **Stepped-up basis**: **The decedent spouse includes ½ of the FMV of the property in their gross estate at death**. This amount is **subject to the marital deduction and receives a full step-up in basis**. * **Reverse gift**: **A technique to transfer an asset with a low basis to a dying spouse to receive a full step-up in basis**. **The technique will not work if the dying spouse dies within one year of the transfer**.

Question 43

A wife bought stock ten years ago for $10,000 which is now worth $100,000. She gifts her husband half in a tenancy by the entirety account and dies four months later. The husband sells the stock at her death for $100,000. What amount is subject to capital gains tax? * $10,000 * $100,000 * $50,000 * $45,000

Answer 43

$45,000 * When the husband received the gift of stock, his basis was deemed $5,000. He inherited his wife's stock with a stepped-up basis of $50,000. His new basis is $55,000, therefore $45,000 is subject to capital gains taxes on the sale of the stock.

Question 44

Which of the following is/are similarities between JTWROS property and tenancy by the entirety property? (Select all that apply) * Property passes by operation of law. * Property avoids ancillary probate if located out of state. * Property may be attached by joint creditors. * Property title is considered a will substitute.

Answer 44

* Property passes by operation of law. * Property avoids ancillary probate if located out of state. * Property may be attached by joint creditors. * Property title is considered a will substitute.

Question 45

A disadvantage of tenancy by the entirety property is that it may "over-qualify" the estate for the marital deduction. * False * True

Answer 45

True * The decedent spouse includes ½ of the FMV of the tenancy by the entirety property in his gross estate which is subject to the marital deduction. This means the decedent's applicable credit is not used to offset the estate tax liability, and the decedent's estate is "over-qualified" for the marital deduction.

Question 46

Which of the following constitute grounds for the partitioning of a tenancy by the entirety? Select all that apply. * Consent of both parties * Divorce * Act of the wife

Answer 46

Consent of both parties Divorce * The tenancy by the entirety cannot be partitioned except with the consent of both parties or through divorce. A tenancy by the entirety cannot be severed by the act of a single spouse.

Question 47

# Section 4 - Tenancy in Common Describe Tenancy in Common

Answer 47

**Tenancy in common is a method by which several owners can own property simultaneously**. For estate tax purposes, there are **no survivorship rights in property held as tenancy in common**. * For the holder of such an interest, this means that **upon the holder's death, the value of his or her respective share of the entire property is included in the holder's gross estate**. * Additionally, it means that the **property will pass to whomever the decedent holder names in a will**. If the deceased dies without a will, the deceased's share of the property will pass to heirs, according to the state intestate succession statutes. * As a result, **the owner's interest in tenancy in common property will be treated in the same manner as separately owned assets**. This variation **causes the tenant in common's property interest to be included in his or her probate estate**. * Thus, **unlike JTWROS property**, it **does not bypass probate**, and * the tenant in common's share is utilized to calculate administrative expenses and attorney's fees. It is also important to note that with a tenancy in common **the owners may determine the percentage of ownership interest between themselves**. In other words, do not automatically assume that each owner has an equal interest in the property. * This **differs from JTWROS between non-spouses and spouses with equal property interest ownership**.

Question 48

Tenancy in Common vs. Joint Tenancy

Answer 48

Property held as a tenancy in common differs from jointly owned property held as JTWROS in several significant aspects. * First, there may be several tenants in common who can own equal or unequal fractional shares of property interests (for example, the northern one-half acre of the township). Unless tenants in common agree to a specific allocation of their property rights in a partition of the property, each tenant in common continues to own a fractional undivided interest in any portion of the property at any given time. * Similar to joint tenancy, tenants in common **are free to transfer their respective shares of their 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. In fact, it is not unusual for all of the tenants in common to be unrelated by blood to the other tenants in common. * **If a conveyance of the entire property is desired, then the signature of all tenants in common would be required**, but there is no requirement that all of the property be conveyed at once. * However, if the tenants in common are unrelated and are **in positions where their interests in the property are potentially adverse to those of the other tenants in common, so that a desired sale of the entire property to a third party is difficult, the property may receive a discount in valuation because of this inability to agree on a sale or conveyance.** Such a discount is referred to as a **co-ownership discount**. **From an estate tax planning perspective, mainly when dealing with a husband and wife, it may become more advantageous to own property as a tenant in common rather than as JTWROS**. * **Creditors of one spouse can only attach the share of tenants in common property that is owned by that spouse, not attach the entire property interest**. * **Also, the decedent's applicable credit can be used to offset the value of this property included in the gross estate since the marital deduction would only apply if the property were bequeathed to the surviving spouse in the decedent's will**.

Question 49

# Practitioner Advice with AUDIO Since **tenants in common is a default assumption for the purchase of property by two or more persons**, it is important to use specific language to designate the ownership to be "joint tenants with right of survivorship." **Christopher Small has been practicing as an Estate Planning attorney since 2005**. He’s devoted his career to helping grieving families through a tough process.

Answer 49

Audio: cmslayfirm.com - Estate Planning https://podcasts.apple.com/us/podcast/243-hold-property-in-joint-tenancy-or-tenants-in-common/id1455795473?i=1000523946183 Joint Tenants - JTWROS - with rights of surviviorship - when one person dies, their property goes to the other owner's Tenants In Common * opposite * when one person dies, their property goes to will, or non-will * lack of probabe affadavit * Do a transfer on death deed - if i die, i want my property to go here When purchasing, you can as

Question 50

What are the Tax Implications for Tenants in common?

Answer 50

Tax Implications For estate tax purposes, there are no survivorship rights in property held as a tenancy in common. * When a tenant in common dies, only that portion of the property the decedent owned will be included in the gross estate. * Thus, if the value of an entire property was $90,000 and the decedent owned a one-third interest, then $30,000 of the property would be included in the deceased tenant's estate. * **Holding property in this form may be advantageous if the owner's objective is to minimize the size of the gross estate and any resultant tax liability**. **Tenants in common are entitled to a division of income from income-producing property according to their respective 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. * If the tenants in common agree to divide the income in any manner other than according to their respective interests in the property, **the portion received by each tenant in common that is in excess of their proportional share of ownership will be considered a gift**. * Therefore, **the tenant in common who receives less than his or her proportional share of the income may be subject to gift tax liability on the excess gifted to another**. The **basis in property held as tenancy in common** is **calculated based on each contributor's share of the property when acquired**.

Question 51

# Example (Taxation: Tenancy in Common) A husband and wife bought property together as tenants in common paying unequal shares. The husband paid 60% of the $100,000 purchase price, and the wife paid 40%. When the husband died, he left his share of the property to his son in his will. The FMV of the property at his death was valued at $200,000. * How much was included in the husband's gross estate? * The son inherited his father's stepped-up basis of $__ ____??____ __. * The wife still retained her original basis in the property of $__ ____??____ __.

Answer 51

* Therefore, 60% or $120,000 was included in the husband's gross estate. * The son inherited his father's stepped-up basis of $120,000, * but the wife still retained her original basis in the property of $40,000.

Question 52

What are the Advantages of Tenancy in Common?

Answer 52

* Tenants in common **can split income among themselves**. If the tenants are members of the **same family, this can be an effective means of splitting income among family members**. * Tenancy in common provides a **readily available and convenient means of transferring the interest in the property**. Specifically, the **consent of other tenants in common is not necessary to effect a transfer of a particular tenant in common's interest**. * Tenancy in common **can reduce the asset's value so held for estate tax purposes**. In other words, **the value of the property interest that will be included in the decedent’s estate is based upon his or her fractional interest in the property** (For example, one-fourth of the property as a tenant in common instead of one-half as a joint tenant or all of it as sole owner). * Tenancy in common **can serve as a means of transferring the property to an intended beneficiary under the will**. The property does not pass automatically to the surviving tenants in common. * Owning assets as tenancy in common **allows us to do effective estate tax planning for spouses.**

Question 53

When is Tenancy in Common Appropriate?

Answer 53

When is Tenancy in Common Appropriate? Tenancy in common is appropriate when a client wishes to: * **Reduce potential estate tax liability** * **Reduce any income tax liability** * **Ensure that the property is transferred to a designated beneficiary** To assist the financial planner in advising the client on which form of property ownership is most appropriate, the advantages and disadvantages of the major forms of property ownership are presented. Click here to view the major forms of property ownership. The tax characteristics, as well as disposition aspects of each of these forms, should be considered in order that the most appropriate form of property ownership for the client may be selected.

Question 54

# Section Four Summary In this lesson, we have covered the following: * **Tenancy in Common**: Tenancy in common property **has several owners who own the property simultaneously**. This property is **passed by a Will and goes through probate**. * **Tenancy in Common vs. Joint Tenancy**: Tenancy in common **property can be given to anyone the owner chooses by will** since the property interest does not pass automatically to joint tenants. * **Tax Implications**: The **gross estate only includes the value of the tenant's interest in the property, which is offset by the tenant's applicable credit**. The **property is not taxed in the decedent tenant’s estate**.

Answer 54

* **Tenancy in Common Advantages**: **Only the tenant's fractional interest is included in the gross estate, not the entire property value**. **Creditors can only reach the fractional interest amount**. * **When Tenancy in Common is Appropriate**: **The owner's objective is to transfer the property to a designated beneficiary(ies) through the will and perhaps reduce income tax liability through transfers to family members in lower tax brackets**.

Question 55

Lifetime control and postmortem control of property interests are characteristics of property held in: (Select all that apply) * Tenancy in Common * Sole ownership * Joint tenancy with right of survivorship * Tenancy by the entirety

Answer 55

Tenancy in Common Sole ownership * The most important feature of sole ownership and ownership of property titled Tenancy in Common is that the individual has total control over their property interests both during lifetime and upon death.

Question 56

A co-ownership discount is a feature of: * Sole Ownership * Joint Tenancy with Right of Survivorship * Tenancy by the Entirety * Tenancy in Common

Answer 56

Tenancy in Common * **When the different tenants in Tenancy in Common, have conflicting interests regarding the sale of the common property and do not agree to the sale, the property gets a discount in valuation**. * This is referred to as a co-ownership discount. * This discount is not available in the case of Sole Ownership, Joint Tenancy with Right of Survivorship and Tenancy by the Entirety.

Question 57

Carol, Ann, and Barbara hold one-half, one-third, and one-sixth interests respectively in a farm. They all share an undivided interest in the farm. What type of ownership applies to this situation? * Joint Tenancy * Tenancy in Common * Single Ownership * Single Tenancy

Answer 57

Tenancy in Common * **Since each owner shares an undivided interest, even though each owns an unequal share, this is considered a tenancy in common**. * In a joint tenancy each owner has a simultaneous, equal share of the entire property. It is not single ownership because there is more than one owner. It is not tenancy by the entirety because the property is not owned by husband and wife.

Question 58

# Section 5 - Life Estate Describe Life Estate

Answer 58

A **person who has a life estate in property or in a trust has the right to live in the property for life or has the right to receive all income from the trust for life**. An owner of property can create a life estate for themselves or give a life estate to another person. **A remainder beneficiary, or remainderman, will receive the entire property interest after the life tenant's death**. * Unlike a trust, the remainder beneficiary has an immediate vested interest in the property. * For example, a remainderman can sell or give away the property without the consent of the life tenant. * However, a buyer would have to wait for the death of the life tenant to actually use the property. **With real property, a life tenant cannot be forced to move out regardless of the misfortunes of the remainder beneficiary**. * **A homestead may be declared in the life estate which prevents a forced sale of the property by the life tenant's creditors**. * The remaining interest is protected from the life tenant's creditors too if the life estate was not created as a fraudulent transfer. **A life tenant is responsible for paying property taxes and homeowners insurance on the property or the remainder beneficiary can sue if the property is not properly maintained**. * **If the property is sold before the death of the life tenant, a portion of the gain is taxed to both the life tenant and the remainderman**. * The **life tenant's gain qualifies for the $250,000 capital gains exclusion but the remainderman's gain does not**. * If the property is not sold, the **remainder beneficiary will receive the property with a full step-up in basis at the life tenant's death**.

Question 59

Describe Receiving a Life Estate

Answer 59

There are different tax consequences for those who receive a life estate and for those who create a life estate in property. * **If you receive a life estate in property by gift or inheritance, you have the immediate right to possess, enjoy or derive income from the property while you are alive**. * **Your interest in the property ends at your death, and the property will not be included in your gross estate**. **The property owner who transfers the life estate to you is subject to gift taxes for the present value of your property interest**. * **The value of your interest is determined by actuarial tables that include your life expectancy, the fair market value of the property, and the prevailing federal interest rate at the time the gift is made**. * **Since a life tenant has a present interest in the property, the owner can take an annual exclusion to reduce their gift tax liability**. **The owner of the property will determine who the beneficiary of the property will be upon your death**. * When the owner transfers the life estate to you, **he or she chooses the ultimate beneficiary of the property at that time**. * **Therefore, a gift is made to the beneficiary as well**. * **The value of the gift is based on the present value of the beneficiary's remainder interest in the property or the trust**. * This is a **gift of a future interest** since the **beneficiary cannot receive the property until the life tenant's death**. * Therefore the **owner cannot take an annual exclusion to offset the gift of property to the remainder beneficiary**. * Annual exclusions reduce taxable gifts if the person receiving the gift has a present right to enjoy the property, not a future right to property interests. **The owner can also transfer a life estate in property to someone at death, and choose who the ultimate beneficiary will be in the will**. * This property is **included in the owner's gross estate and is subject to estate tax when the owner dies**. * If the owner bequeaths a life estate in property to a spouse, **the owner cannot receive an estate tax marital deduction for the value of the life estate transferred**. * The reason is that the life estate is **considered terminable interest property**. * Terminable interest property **means that the spouse's interest will end at death and the spouse has no control over the distribution of the marital property upon their death**. * **The life estate in real property or in a trust will not be included in the surviving spouse's estate at death due to this terminable interest**.

Question 60

# Practitioner Advice: **A property owner who transfers terminable interest property to a spouse as a gift during life or at their death may receive a gift or estate tax marital deduction for the transfer**. * **During life, the donor can "qualify" the property for the marital deduction on the gift tax Form 709**. * **At death, the decedent's executor or executrix can "qualify" the property for the marital deduction on the estate tax Form 706**. * **This is known as Q-TIP (i.e., Qualified Terminable Interest Property)**. * If so qualified, **the donor or decedent receives a marital deduction for the transferred life estate, and the property will be included in the surviving spouse's estate at death**.

Answer 60

Another way to have terminable interest property receive a marital deduction is to **give the spouse with a life estate a general power of appointment over that property in a will or a trust**. * The property the spouse had the power of appointment over will be included in the spouse's estate at death.

Question 61

Describe Estate for a Term of Years

Answer 61

**Someone who receives an estate for a term of years is given the right to use the property or receive the trust income until the term ends**. If death occurs before the term has expired, a will can appoint another tenant to use the property or receive the income until the term officially ends. * If there is **no will or did not plan for this event, the remainder of the term interest will pass through intestacy**. * The donor **can take an annual exclusion to offset this gift of property since the recipient has a present interest in the property for a specified time**. * **Due to the terminable interest rules, the donor or decedent cannot take a marital deduction if the property is gifted or bequeathed to a spouse**. * In this case, the **property cannot "qualify" for the marital deduction since the spouse is not given an interest in the property for life, only for a number of years instead**. **The property owner will determine the remainder beneficiaries of the property or trust when the transfer takes place**. * **The remainder beneficiaries may have a vested or contingent remainder interest**. * A **vested interest is fixed and absolute**. * A beneficiary who dies before receiving the remainder interest may designate a new remainder beneficiary in his will. * A beneficiary who receives a **contingent remainder interest will only receive the property in the event of a specific occurrence**. For example, the remainder beneficiary may only receive the trust corpus if they outlive the income beneficiary's term interest.

Question 62

Describe Creating a Life Estate

Answer 62

Creating a Life Estate A **property owner can create a life estate for themselves and gift the remainder interest of their real property to someone else simply by changing a deed**. * The **owner would continue to use and enjoy their real property or receive all income from a trust for life and would control who the property passes to at their death without needing a will**. * **Real property transferred by life estate avoids probate** and all the associated costs and/or delays. When an owner creates a life estate, **the owner is gifting the remainder interest of the property to a chosen beneficiary**. * **The present value of the remainder interest is subject to gift tax, and the owner cannot use their annual exclusion to offset the tax on this future interest gift**. Although the gift of the property interest to the remainderman is a completed gift, under **Section 2036**, **the entire FMV of the property will be included in the life tenant's estate at death**. * The reason is that the life tenant retained too much control over the property by having unrestricted use and a right to all income until death. * This is the **same as having sole ownership of the property since the owner's enjoyment and use of the property was not affected by the partial gift of the remainder interest**. * However, **the taxable gift the owner made when the deed was changed will not be included in the decedent's estate tax calculation as an adjusted taxable gift**. * This differs from most taxable gifts that are included in the estate tax calculation. The reason for its exclusion from the adjusted taxable gift category is that **the entire fair market value of the property will be included in the decedent's gross estate instead**. The **remainder beneficiary will receive a full step-up in basis in the property at the life tenant's death**.

Question 63

# Section 5 - Life Estate Summary A life estate is a **form of real property ownership that allows a life tenant to immediately possess, enjoy, and derive income from the property for the rest of their life**. * An income beneficiary can be given a life estate in a trust that provides them with all trust income for life. * **Life estates in property or trusts can be received as gifts or inheritances from others, or the owner of property can create a life estate for themselves**. * There are different gift and estate tax consequences for life estates that are received by individuals or created by property owners. In this lesson, we have covered the following: * **Life Estate**: **Property is owned by a life tenant who has lifetime ownership rights and by a remainder beneficiary who receives possession of the property at the life tenant's death**. This form of ownership is a **will substitute** since it is **transferred by deed, and avoids probate if it is included in the life tenant's estate**. * **Receiving a Life Estate**: A person who is given a life estate in property **has control and use of the property throughout their life, but they cannot choose the beneficiary of the property at their death**. This lack of control means that the **value of the property will not be included in the life tenant's estate at death**. If a spouse is given a life estate in property, the **marital deduction cannot be used (in the absence of a Q-TIP election) by the donor or the decedent's executor to offset a gift or estate tax liability**.

Answer 63

* **Estate for a Term of Years**: A person can be given an interest in property or trust income for a specified period of time. After the term ends, the property is automatically transferred to another individual, the remainder beneficiary, chosen by the donor. The remainder beneficiary may have a vested or contingent remainder interest in the property. * **Creating a Life Estate**: A **sole owner of property can convert their ownership into a life estate for themselves, and gift the remainder interest to someone else**. They **can also create a trust that provides them with income for life, and which passes to a remainder beneficiary at their death**. In both situations, the **creator has too much control over the property since they can use and enjoy the property for life and select the remainder beneficiary**. Therefore, the **full value of the property or trust is included in their gross estate at death, even though they had previously gifted the remainder interest to someone else. The remainder interest gift will not be included as an adjustable taxable gift in the estate tax calculation**.

Question 64

Tom's will gave his wife Mary a life estate in his Italian villa at his death in the current year. His executor did not elect to use the Q-TIP election. What are the estate tax consequences for Tom's estate? (Select all that apply) * The FMV of the villa is included in Tom's estate but the estate tax marital deduction is not available to offset the estate tax liability. * The FMV of the villa is included in Tom's estate but it is offset by the estate tax marital deduction. * The FMV of the villa is included in Tom's estate, but since Mary is his wife, she has a general power of appointment over the property. Therefore, the estate tax marital deduction will offset the value of the villa in Tom's estate. * The FMV of the villa is included in Tom's estate but his applicable credit amount is available to offset any estate tax liability.

Answer 64

The FMV of the villa is included in Tom's estate but the estate tax marital deduction is not available to offset the estate tax liability. The FMV of the villa is included in Tom's estate but his applicable credit amount is available to offset any estate tax liability. * Tom has given Mary terminable interest property that does not receive a marital deduction in his estate, to reduce the value of his taxable estate in 2018. **Tom can use his applicable credit amount to reduce any estate tax liability.** * Mary does not automatically receive a general power of appointment over the property since it must be given to her expressly in Tom's will. * **If the executor had made a Q-TIP election, the marital deduction would have been available to Tom's estate**.

Question 65

Peter and his wife titled their home as JTWROS. When his wife died the property avoided probate. Peter as sole owner wants to avoid probate again and continue to live in his home for life. Therefore he changed his deed to create a life estate in the home, and gave his son the remainder interest. What are the gift tax consequences of this transaction? * There is no gift tax due because the son will not receive the property until Peter dies. * Peter has made a gift to his son for the present value of the remainder interest in the property. * Peter can take an annual exclusion to offset the gift tax liability on the remainder interest gift. * Peter has made a gift to his son of the fair market value of the home when he changed the deed.

Answer 65

Peter has made a gift to his son for the present value of the remainder interest in the property. * When Peter changed the deed, he made a gift to his son of the present value of the home's remainder interest. This is less than the home's current fair market value. * The gift of the home's remainder interest is a future interest gift, so annual exclusions do not apply. Annual exclusions reduce the taxable amount of present interest gifts.

Question 66

# Section 6 - Community Property Community Property ownership **has complex income, estate, and gift tax consequences**. The community property owner needs to be aware of these **adverse consequences and the consequences stemming from a client's move from a community property state to a common law state and vice versa**. The advice of a competent attorney is imperative when attempting to structure a client's estate plan and is especially important when community property is involved. To ensure that you have a basic understanding of forms of property ownership, the following topic will be covered in this lesson: * Defining Community Property

Answer 66

After completing this lesson, you will be able to: * Explain the classification of assets, * Define community property, * Explain the difference between separate and community property, * Describe the management of community property, * Identify exceptions of management of community property, * Explain the tax implications of community and separate property, and * Describe quasi-community property.

Question 67

Which are the Community Property States

Answer 67

Community property is a form of ownership held by a husband and wife in the nine community property states including: * Arizona * California * Idaho * Louisiana * Nevada * New Mexico * Texas * Washington * Wisconsin The following states are not considered community property states. Instead, they **offer the opportunity for couples to opt-in to receive community property treatment of specific assets or activate overall community property treatment of one's property**. * Alaska * South Dakota * Tennessee With property held in community property, **both husband and wife own a separate, undivided, equal interest in the property**. * Each spouse has a separate interest acquired in the property during marriage. Thus, the presumption usually arises that any property acquired by the spouses during the term of the marriage is to be divided equally between them, should one of the spouses die or should the couple obtain a divorce after acquiring the property. Even if only one of the spouses initially acquires property or earns income that is used to benefit the couple, **community property states emphasize the efforts of both spouses that directly or indirectly lead to the acquisition of property or income**. * As a result, even if only one of the spouses is an income earner, it is presumed that the efforts of the non-working spouse contributed to the benefit of the marital property. As a result, **all property acquired by the spouses during the marriage is presumed to be community property**. In its income, estate, and gift tax implications, **community property differs significantly from most common-law forms of property ownership: Joint Tenancy with Right of Survivorship, Tenancy in Common, and Tenancy by the Entirety**. * Each community property state also has its own laws dealing with this property type.

Question 68

Describe Asset Classification in community property

Answer 68

The general rule for classification of assets as community property or separate property depends on: * When the property was acquired * How the property was titled at the time it was acquired Unless the spouses agree otherwise, **if property was acquired as separate property by either spouse prior to the marriage, it retains its status as separate property even after the marriage unless the parties by agreement decide to classify it otherwise**. In addition, **gifts and inherited assets received individually while married remain separate property**. Property, which is acquired with the separate assets of either spouse, retains its character as the separately owned property of the spouse providing the consideration. **If the spouses acquire the property at any time following the marriage, it is presumed to be community property unless the couple specifically titles the property in some other form of ownership**. * However, in the absence of an agreement or in the absence of acquiring the property with only separately owned assets, **all the property acquired during the course of the marriage is classified as community property**. * This **includes money earned and/or property purchased by either spouse, post-marriage**. * Finally, if separately owned assets are mixed with community property assets, and the character of the separately owned assets cannot be distinguished from the community property, it is considered community property.

Question 69

# Example (Asset Classification: Separately Owned) A spouse (husband) receives a $30,000 inheritance from his father's estate, the property remains the husband's separately owned property.

Answer 69

Example (Asset Classification: Community Property) A spouse (husband) receives a $30,000 inheritance from his father's estate and deposits the money into a jointly owned brokerage account. Over time, contributions and withdrawals continue and the inheritance becomes indistinguishable from the other funds within the account. The commingled, initially separately owned inherited assets are considered to be community property assets.

Question 70

Describe the Classification Presumptions

Answer 70

While each state has local variations on the classification of assets, there are general presumptions on the classification of community property that apply in all nine of the community property states. These presumptions include the following: * All **property acquired during the marriage** is **presumed to be community property**. * The community property presumption can be overcome by clear and convincing evidence presented by the party seeking to claim the property as separate. For example, evidence that only one spouse provided all of the consideration for the property with separately owned assets, or that the parties had previously entered an agreement declaring the property to be the separate property of the spouse seeking to overcome the presumption. * In a situation where separate and community property are mixed so that it is no longer possible to determine which is separately owned and which is community property, the property will be treated as community property. * If the property has been established as separately owned property, it will retain this characterization until clear and convincing evidence is presented that establishes that the property is no longer separately owned. * Even if the couple moves to a non-community property state, any asset acquired during marriage while living in a community property state retains its community status.

Question 71

Describe Estate Tax Implications for Community Property

Answer 71

There are certain guidelines for the tax treatment of property. Property is treated as separately owned or community property in accordance with: * The state in which the property was acquired * The state where the spouses resided at the time of death * The terms of property agreement entered into by the parties during the course of the marriage * **For community property interests, a decedent's gross estate would include one-half of the value of a residence, stocks, bonds, personal property, retirement plan assets, and IRAs**. * **It would include one-half of the death benefit proceeds of a life insurance policy obtained on the life of one of the spouses since the policy and premiums were paid with community property assets**. * The estate would also **include half of the cash surrender value of a life insurance policy held on a third party's life**. * **Community property that is titled in one spouse's name is not treated as separate property therefore one-half will be included in the decedent's estate**. A **significant advantage of community property is that the decedent spouse's share of the property included in the gross estate as well as the surviving spouse's share of the same property will receive a full step-up in basis at death**. For example, if a husband and wife owned community property that was valued at $600,000 at acquisition, and was valued at $1 million at the wife's death, then $500,000 will be included in the wife's gross estate. **The husband will receive her half of the property with a new basis of $500,000 and his original basis in the property of $300,000 will be stepped up to $500,000. The husband now owns 100% of the property with a new basis of $1 million equal to the property's FMV at the date of his wife's death**. Using the same example, **if the wife bequeathed her share of property to her son in her will, then $500,000 is included in her gross estate, and her son will receive the property with a basis of $500,000**. The husband's share of the property will also receive a step-up in basis at his wife's death so that his new basis in the property is valued at $500,000. **Community property that is titled as JTWROS or Tenancy in Common between spouses will not receive a full step-up in basis at the decedent's death, since only the decedent's one-half interest is stepped up**. An owner of separate property that was acquired before marriage or as a gift or inheritance during the marriage can make gifts or sell the property without the other spouse's consent. The owner will have complete testamentary disposition over the property at death therefore **the full value of the owner's separate property is included in his gross estate and probate estate**.

Question 72

Classification Evidence

Answer 72

In classification evidence, **furnishing records, purchase receipts, deeds of title, and records of deposit or withdrawal provides the evidentiary proof needed to classify property as community or separate**. These records establish the fact that the purchaser provided all consideration for the property. The **property was purchased with separately owned assets of one spouse or that the property was initially titled in sole ownership or joint tenancy with right of survivorship and acquired with the funds of one spouse through gift or inheritance**. If this evidentiary burden is met, the property will be classified as community or separate even though acquired during the marriage. * Since neither spouse can be certain of whether he or she will survive the other, **each should carefully document all property acquisitions and should maintain a meticulous record-keeping system**. Classification Evidence * **Furnishing Records**: These establish that the purchaser provided all consideration for property. * **Purchase Receipts**: Property purchased with separately-owned assets of one of the spouses. * **Deeds of Title**: **Property titled in sole ownership or joint tenancy with right of survivorship**. * **Records of Deposit**: Property **acquired with funds acquired from one of the spouses through gift or inheritance**.

Question 73

Describe Quasi-Community Property

Answer 73

Quasi-community property is** property acquired by spouses while residing in a common-law state, which is treated as community property after they move to certain community property states;** * such as **California, Arizona, Idaho, Washington, and Wisconsin**. * This **occurs only if the couple's common-law property interests would have been considered community property had they originally acquired it in a community property state**. * For example, **gifts of property made to a spouse are not considered to be community property when the donee spouse lives in a community property state**. * Likewise, **a gift made to a spouse who lives in a common-law state is not considered to be community property when the couple later moves to a quasi-community property state**.

Question 74

# Example 1: Sue and Tom lived in Ohio, a common law state, and bought a home with money that Tom received as a wedding gift from his father. Years later they sold their home and moved to California where they bought a new home. * When Tom dies the California home would not be treated as community property in Tom's estate; it is his separate property. * The gift Tom used to purchase the home in Ohio would not have been community property had he initially acquired the home in a community property state.

Answer 74

Sue and Tom lived in Ohio, a common law state, and bought a home with money that Tom received as a wedding gift from his father. Years later they sold their home and moved to California where they bought a new home. When Tom dies the California home would not be treated as community property in Tom's estate; it is his separate property. The gift Tom used to purchase the home in Ohio would not have been community property had he initially acquired the home in a community property state.

Question 75

# Example 2: Mary and Doug lived in Florida, a common law state, and bought a home with their combined earnings after marriage. They subsequently sold their home and moved to Arizona, using the proceeds to buy a new home. * At Mary's death the Arizona home is treated as community property in her estate since their home in Florida bought with marital assets would have been community property had they initially acquired it in Arizona. * Mary's gross estate will include one-half of the home, and if she leaves it to Doug in her will, she will receive a marital deduction for her one-half interest, which also goes through probate. Doug will receive a full step-up in basis in the home equal to its FMV at Mary's date of death.

Answer 75

Example 2: Mary and Doug lived in Florida, a common law state, and bought a home with their combined earnings after marriage. They subsequently sold their home and moved to Arizona, using the proceeds to buy a new home. At Mary's death the Arizona home is treated as community property in her estate since their home in Florida bought with marital assets would have been community property had they initially acquired it in Arizona. Mary's gross estate will include one-half of the home, and if she leaves it to Doug in her will, she will receive a marital deduction for her one-half interest, which also goes through probate. Doug will receive a full step-up in basis in the home equal to its FMV at Mary's date of death.

Question 76

# Example 3: In the example above, if Mary had titled the home they bought in Florida in her name only, the property would have belonged solely to Mary until her death or divorce in Arizona. * Had Mary and Doug divorced after moving to Arizona, each spouse would receive one-half of the property. * If Doug died before Mary, his interest in the property would cease, and nothing would be included in his gross estate. * If Mary predeceased Doug, she could only dispose of one-half of the property by will since Doug has a vested one-half interest in the property. * However, 100% of the value of the home would be included in Mary's gross estate at death.

Answer 76

Example 3: In the example above, if Mary had titled the home they bought in Florida in her name only, the property would have belonged solely to Mary until her death or divorce in Arizona. Had Mary and Doug divorced after moving to Arizona, each spouse would receive one-half of the property. If Doug died before Mary, his interest in the property would cease, and nothing would be included in his gross estate. If Mary predeceased Doug, she could only dispose of one-half of the property by will since Doug has a vested one-half interest in the property. However, 100% of the value of the home would be included in Mary's gross estate at death.

Question 77

# Section Six Summary Assets are classified into community property and separate property. **Community property is a form of ownership held by husband and wife when property is acquired in a community property state**. But it is in existence in **only nine states**. Community property differs from most common-law forms of property ownership. There are issues involving community property as a part of the estate planning process. As each community property state has its own laws that affect marital rights, the **financial planner should refer the case to an attorney who can consult the laws of each of the community property states before making an estate plan**. In this lesson, we have covered the following: * **Community property**: Any property acquired during the course of the marriage in a community property state. It **allows both the husband and wife to have a separate, undivided and equal interest in the property**.

Answer 77

* **Asset Classification**: Assets are **classified into community or separate property based on when and how the property was titled at the time it was acquired**. * **Classification of Evidence**: Provides the proof to classify property. * **Tax treatment of property**: Based on three factors including the state in which the property was acquired, the state where the spouses resided at the time of death, and the terms of property agreement of both parties in the course of their marriage. * **Tax implications**: The **surviving spouse receives a full step-up in basis for their ½ share of the community property owned, in addition to receiving the decedent's stepped-up basis in ½ of the property included in the gross estate**. * **Quasi-community property**: Property that is acquired by spouses in a common law property state that may be treated as community property at death or divorce, when a couple moves to a quasi-community property state.

Question 78

Under which property law is the property equally divided between the spouses as a result of death or in the case of divorce? * Community property * Joint property * Separate property * Common property

Answer 78

Community property * Community Property is any property acquired by the spouses in the course of their marriage. The property is divided equally between them if they divorce, or in the case of death of one of the partners.

Question 79

Separate property is: (Select all that apply) Property acquired after marriage Property acquired through gift after marriage Property acquired prior to marriage by either spouse Property acquired through inheritance after marriage Property acquired prior to marriage remains separate property, even after marriage. Property acquired as gift or inheritance even after marriage retains the status of separate property. But property acquired by either or both of the spouses themselves is deemed to be community property, unless titled otherwise.

Answer 79

Property acquired through gift after marriage Property acquired prior to marriage by either spouse Property acquired through inheritance after marriage * Property acquired prior to marriage remains separate property, even after marriage. Property acquired as gift or inheritance even after marriage retains the status of separate property. But property acquired by either or both of the spouses themselves is deemed to be community property, unless titled otherwise.

Question 80

Which individual will receive the entire property interest after the life tenant's death in a life estate? * Grantor * Conservator * Trustee * Remainderman

Answer 80

Remainderman * A remainderman, or remainder beneficiary, will receive the entire property interest after the life tenant's death. Unlike a trust, the remainder beneficiary has an immediate vested interest in the property.

Question 81

Betsy has elected to use a reverse gift strategy to remove a highly appreciated stock from her estate by gifting the asset to, Kevin, a terminally ill relative. Identify the transfer that will result in a step-up in basis to the recipient upon Kevin’s death. I. Betsy gifts the stock to Kevin; Kevin dies 6 months later and bequeaths the stock back to Betsy. II. Betsy gifts the stock to Kevin; Kevin dies 14 months later and bequeaths the stock back to Betsy. III. Betsy gifts the stock to Kevin; Kevin dies 7 months later and bequeaths the stock to Dan, Betsy’s husband. IV. Betsy gifts the stock to Kevin; Kevin dies 15 months later and bequeaths the stock to his cousin Owen. * II and IV * I and III * IV only * I and II

Answer 81

II and IV The reverse gift transfer will work if * the decedent lives for more than one year after receiving the gift, or * if the gifted property is bequeathed to anyone other than the original donor or the donor's spouse. In these two situations the transferred property would receive a stepped-up basis in the decedent spouse's estate for the property's fair market value.

Question 82

Select the specialized form of property ownership existing between co-tenants who are husband and wife in which the spouses own the whole interest collectively, but no undivided individual share. * Tenancy in Common * Community Property * Joint Tenants with Rights of Survivorship * Tenancy by the Entirety

Answer 82

Tenancy by the Entirety * A tenancy by the entirety is a specialized form of joint tenancy with right of survivorship existing between co-tenants who are husband and wife. * The estate is based on the common law concept of "spousal unity," that husband and wife are one person. * The spouses own the whole interest collectively, but no undivided individual share.

Question 83

For community property interests, a decedent's gross estate would include each of the following except * One-half of the value of a residence * One-half of community property that is titled in one spouse's name * One-half of the value of retirement plan assets and IRAs * The total death benefit proceeds of a life insurance policy obtained on the life of one of the spouses

Answer 83

The total death benefit proceeds of a life insurance policy obtained on the life of one of the spouses * One-half of the death benefit proceeds of a life insurance policy obtained on the life of one of the spouses would be included in the decedent’s gross estate since the policy and premiums were paid with community property assets.

Question 84

Identify the correct statement regarding property held in sole ownership: * Postmortem control of property is not available. * The owner may not transfer the property to anyone he or she chooses through the provisions of the will. * The owner has proportional ownership and minimal control of the property. * To avoid probate, the owner may transfer the individually owned property into a revocable living trust.

Answer 84

To avoid probate, the owner may transfer the individually owned property into a revocable living trust. * Both lifetime control and postmortem control of property are characteristics of property held in sole ownership. The owner has absolute ownership and control of the property. * The owner may transfer the property to anyone he or she chooses through the provisions of the will.

Question 85

Select characteristics of assets titled tenancy in common. I. Owners must have an equal interest in the property. II. Tenancy in common property is included in the probate estate. III. Property will pass to whomever is named in a will. IV. Several owners can own property simultaneously. * I, II, III, and IV * I only * I and IV * II, III, and IV

Answer 85

II, III, and IV * With a tenancy in common the owners may determine the percentage of ownership interest between themselves, there is no need for an equal distribution. * Property will pass to whomever the decedent holder names in a will, as a result it will be included in the probate estate.

Question 86

The recipient of property through a life estate has each of the following rights except * Exclusion of the property from their gross estate. * The right to derive income from the property * A future interest to possess the property * The immediate right to enjoy the property while alive

Answer 86

A future interest to possess the property * If you receive a life estate in property by gift or inheritance, you have the immediate right to possess, enjoy or derive income from the property while you are alive. * at death interest in the property ends, and * the property will not be included in the gross estate.

Question 87

Assets owned jointly with rights of survivorship may be appropriate: I. To ensure that the property automatically passes to a specific individual upon the owner's death. II. To avoid probate. III. To reduce administrative costs and attorney's fees. IV. To minimize income tax liability. * I and II * I only * III and IV * I, II, III, and IV

Answer 87

I, II, III, and IV Assets owned jointly with rights of survivorship may be appropriate for all the reasons provided.

Question 88

A reverse gift transfer will result in a stepped-up basis on transfer at death in each of the following situations except * If the gifted property is bequeathed to anyone other than the original donor. * If the gifted property is bequeathed to anyone other than the donor's spouse. * The decedent lives for more than one year after receiving the gift. * If the gifted property is transferred back to the original donor within a year of the original gift.

Answer 88

If the gifted property is transferred back to the original donor within a year of the original gift. The reverse gift transfer will work if * the decedent lives for more than one year after receiving the gift, or * if the gifted property is bequeathed to anyone other than the original donor or the donor's spouse. In these two situations the transferred property would receive a stepped-up basis in the decedent spouse's estate for the property's fair market value.

Question 89

Each of the following function as probate substitutes except * Assets owned within a trust prior to death * Assets transferring under a beneficiary designation * Assets jointly-owned with rights of survivorship * Assets identified within a will * Assets identified within a will go through the probate process.

Answer 89

Assets identified within a will * Assets jointly-owned with rights of survivorship, assets transferring under a beneficiary designation, and assets owned within a trust prior to death, are probate substitutes.

Question 90

Select the classification evidence that provides the proof needed to categorize property as community or separately owned. I. Furnishing records II. Purchase receipts III. Deeds of title IV. Records of deposit or withdrawal * II and IV * I, III, and IV * III only * I, II, III, and IV

Answer 90

I, II, III, and IV * In classification evidence, furnishing records, purchase receipts, deeds of title, and records of deposit or withdrawal provides the evidentiary proof needed to classify property as community or separately owned.

Question 91

Which of the following statements concerning ownership termination of assets titled JTWROS is correct? * The joint tenancy may only be terminated unanimously by the joint tenants. * It is costly and time-consuming to terminate a JTWROS property interest. * It is not prudent to obtain the signature of the non-consenting joint tenants. * The severance of a joint tenancy does not require the consent of all joint tenants.

Answer 91

The severance of a joint tenancy does not require the consent of all joint tenants. * The severance of a joint tenancy does not require the consent of all joint tenants. * It is easy to terminate a property interest, which is owned as JTWROS. * The joint tenancy may be terminated unilaterally by any one of the joint tenants. * As a practical matter, it is always prudent to obtain the signature of the non-consenting joint tenant(s).

Question 92

Tenancy in common is appropriate when a client wishes to achieve each of the following except * Reduce administrative expenses and costs * Ensure that the property is transferred to a designated beneficiary * Reduce potential estate tax liability * Reduce any income tax liability

Answer 92

Reduce administrative expenses and costs * Tenancy in common is appropriate when a client wishes to: * Reduce potential estate tax liability * Reduce any income tax liability * Ensure that the property is transferred to a designated beneficiary * **Tenancy in common will lead to increased administrative expenses and costs as property passes via a will through the probate process**.

Question 93

Joao and Nina bought a vacant lot together as tenants in common. Joao paid 20% of the $500,000 purchase price and Nina paid 80%. When Joao died, he left his share of the lot to his son, Alonso, in his will. The FMV of the property at his death was valued at $800,000. What is the amount of the basis Alonso inherited for the vacant lot? * $160,000 * $400,000 * $500,000 * $100,000

Answer 93

$160,000 * The basis in property held as tenancy in common is calculated based on each contributor's share of the property when acquired. * Joao contributed 20% of the original purchase. * Thus, 20% of the FMV on the date of death was included in Joao’s gross estate. * 0.20 x $800,000 = $160,000 * Alonso will inherit Joao’s stepped-up basis of $160,000.

Question 94

Anton and Phoebe bought an A-frame cabin together as tenants in common. Anton paid 60% of the $300,000 purchase price and Phoebe paid 40%. When Anton died, he left his share of the property to his daughter, Zella, in his will. The FMV of the property at his death was valued at $600,000. How much of the A-frame was included in Anton’s gross estate? * $600,000 * $180,000 * $360,000 * $300,000

Answer 94

$360,000 * The basis in property held as tenancy in common is calculated based on each contributor's share of the property when acquired. * Anton contributed 60% of the original purchase. * Thus, 60% of the FMV on the date of death was included in Anton's gross estate. * 0.60 x $600,000 = $360,000

Question 95

Assets titled joint tenants with rights of survivorship I. may be owned by only by spouses. II. qualify for unlimited marital deduction. III. may incur gift taxes if the spouse is a non-U.S. citizen. IV. automatically transfer decedent's interest to the surviving owner. * II, III, and IV * II and IV * I only * I and II

Answer 95

II and IV * Property that is titled JTWROS may be owned by spouses or non-spouses. * Regardless of whom the joint owners are, the decedent's interest will automatically transfer to the surviving owner.

Question 96

Which of the following is not a community property state? * California * Oregon * Arizona * Washington

Answer 96

Oregon * Community property is a form of ownership held by a husband and wife in the **nine community property states** including: **Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin**.

Question 97

Regardless of the provisions within the will, the surviving spouse may be entitled to a minimum share of the decedent's estate. This right is afforded to a spouse under * Testamentary directives * Survivorship clauses * Pro rata bequests * Elective share statutes

Answer 97

Elective share statutes * If the individual owner of the asset is married, regardless of the provisions within the will, the surviving spouse may be entitled to a minimum share of the decedent's estate. This right is afforded to a spouse under the **state's elective share statutes**.

Question 98

A husband and wife bought a home for $500,000 titled tenancy by the entirety. The husband paid 30% ($150,000) and the wife paid 70% ($350,000). When the husband died in 2021 the home was valued at $800,000 and ½ of the property or $400,000 was included in his gross estate. What was the wife’s new basis in the property? * $650,000 * $550,000 * $400,000 * $800,000

Answer 98

$650,000 * Although the wife paid 70% when they acquired the property, each spouse is considered to own an equal ½ share under tenancy by the entirety. * Her original basis at acquisition was $250,000 and she receives a step-up of her husband’s ½ based on the FMV of the home on the date of death (0.50 x $800,000 = $400,000). * The new basis in the property is her original $250,000 basis, plus the husband’s $400,000. * $250,000 + $400,000 = $650,000

Question 99

Which statement accurately describes a characteristic of tenancy by the entirety? * Tenancy by the entirety offers no protection from creditors. * Property held in tenancy by the entirety can only be severed with the consent of both spouses. * Property held in tenancy by the entirety cannot be severed by divorce. * Business partners may hold property as tenants by the entirety.

Answer 99

Property held in tenancy by the entirety can only be severed with the consent of both spouses. * **Only husband and wife may hold the property as tenants by the entirety**. * Tenancy by the entirety **offers limited protection from creditors as well**. If one spouse defaults on debts and creditors are seeking compensation, **the most the creditor can do is put a lien on the property**. * Property held in tenancy by the entirety **can only be severed with the consent of both spouses or by divorce**.

Question 100

An uncle and niece bought a downtown storefront for $50,000 and titled the property JTWROS. The uncle paid 60% and the niece paid 40%. The uncle died in 2021 the lot was valued at $160,000. The uncle's gross estate included 60% of $160,000 or $96,000. The niece received his uncle's share of the property and now has sole ownership of 100% of the property. What is the niece’s current basis? * $160,000 * $50,000 * $96,000 * $116,000

Answer 100

$116,000 * The niece's new basis is $116,000, based on her original basis of $20,000 (0.40 x $50,000) plus his uncle's share of property that was stepped-up in basis to $96,000 (0.60 x $160,000). $20,000 + $96,000 = $116,000

Question 101

Select the specialized form of property ownership existing between co-tenants who are husband and wife in which the spouses own the whole interest collectively, but no undivided individual share. * Joint Tenants with Rights of Survivorship * Community Property * Tenancy by the Entirety * Tenancy in Common

Answer 101

Tenancy by the Entirety * A tenancy by the entirety is a **specialized form of joint tenancy with right of survivorship existing between co-tenants who are husband and wife**. The estate is **based on the common law concept of "spousal unity," that husband and wife are one person**. The **spouses own the whole interest collectively, but no undivided individual share**.

Question 102

Identify the advantages of titling an asset as tenancy in common. I. Control of property transfer II. Splitting income from property among owners III. Increased property valuation IV. Non-fractional interests * III only * I and II * I only * III and IV

Answer 102

I and II * Tenancy in common can serve as a means of transferring the property to an intended beneficiary under the will. The property does not pass automatically to the surviving tenants in common. * Tenants in common can split income among themselves.

Question 103

The owner of individually owned financial assets is responsible for paying taxes on each of the following except * Interest income * Capital gains * Dividends * Stock rights

Answer 103

Stock rights * The owner is responsible for paying taxes when purchasing the property, owning the property, when the property yields an income, and when transferring the property to someone else: For financial assets, the owner is responsible for taxes on any dividends, interest income and capital gains. * Stock rights are nontaxable.

Question 104

Richard passed away and owned a two-thirds interest in tenancy in common property valued at $90,000. How much of the property would be included in Richard’s estate? * $30,000 * $90,000 * $0 * $60,000

Answer 104

$60,000 * When a tenant in common dies, only that portion of the property owned by the decedent will be included in the gross estate. * Richard had 2/3 interest in a property valued at $90,000. * Therefore, 2/3 of $90,000 = $60,000. $60,000 will be included in Richard’s gross estate.

Question 105

A reverse gift transfer will result in a stepped-up basis on transfer at death in each of the following situations except * If the gifted property is bequeathed to anyone other than the original donor.You shouldn't have checked this. * The decedent lives for more than one year after receiving the gift. * If the gifted property is bequeathed to anyone other than the donor's spouse. * If the gifted property is transferred back to the original donor within a year of the original gift.

Answer 105

back to the original donor within a year of the original gift. The reverse gift transfer will work if * the decedent lives for more than one year after receiving the gift, or * if the gifted property is bequeathed to anyone other than the original donor or the donor's spouse. * In these two situations the transferred property would receive a stepped-up basis in the decedent spouse's estate for the property's fair market value.

Question 106

Each of the following should be classified as community property except * Money earned by either spouse, post-marriage. * Property purchased by either spouse, post-marriage. * Commingled separately owned assets and community property assets. * Inherited assets bequeathed to either spouse, individually, while married.

Answer 106

Inherited assets bequeathed to either spouse, individually, while married. * Community Property Money earned by either spouse, post-marriage Property purchased by either spouse, post-marriage Commingled separately owned assets and community property assets * Separately Owned Property acquired by either spouse prior to marriage Gifts to an individual spouse while married. Inherited assets bequeathed to either spouse, individually, while married.

Question 107

Identify the correct statements regarding life tenants. I. Life tenants are responsible for for paying property taxes and homeowners insurance on the property. II. If the property is sold before the death of the life tenant, a portion of the gain is taxed to the life tenant. III. If the property is sold before the death of the life tenant, the life tenant's gain qualifies for the $250,000 capital gains exclusion. IV. With real property, a life tenant cannot be forced to move out of a property. * I only * I, II, III, and IV * I and IV * II and III

Answer 107

I, II, III, and IV * A person who has a life estate in property or in a trust, has the right to live in the property for life, or has the right to receive all income from the trust for life. * An owner of property can create a life estate for themselves or give a life estate to another person.