De Paul Asset Titling

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Estate Planning
Asset Titling and Property Interests
Session 1
DePaul University CFP® Program
What is “estate planning?
Estate planning is a process.
 Begins with accumulation and ends with
disposal of an estate.
Good estate planning is effective and efficient.
 Attempts to eliminate uncertainties
 Attempts to maximize the value transferred
 Addresses non-financial concerns e.g.,
designation of guardian for minor children
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What Is Estate Planning About?
Estate planning is not simply having a Will.
 During life: an orderly arrangement of an individual's assets to
provide most effectively for their economic needs while living.
 At death: meeting the personal and economic needs of those to
benefit from the estate.
Required knowledge includes the law and practice related to:
 wills
 descent and distribution
 trusts and future interests
 real and personal property
 gifts
 taxation of gratuitous transfers
 probate procedure and practice.
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Advantages to Estate Planning
In the context of financial planning, estate planning has
several advantages:
 Clients get to choose the people that will receive their assets
and know that their wishes carry the word of law.
 Clients can arrange their affairs to minimize the impact of taxes
and other expenses on the family wealth.
 Clients enjoy the peace and satisfaction of knowing that their
estate is in order and that their loved ones will not have to deal
with a costly administrative nightmare.
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4
Asset Titling
Whether the transfer of an asset has occurred depends on how,
and in whose name, the asset is titled.
 Assets can be titled in the name of a/an:


Individual
Multiple owners
 As tenants in common
 As joint tenants with rights of survivorship (JTWROS)

Minor children
 Under custodial arrangements

Married couple
 As joint tenants with rights of survivorship (JTWROS)
 As tenants by the entirety (TBE)
 As community property (certain states)


Trust
Other entity
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Sole Ownership
Sole ownership means the property is owned by
a sole individual (also called fee simple).

Easiest form of ownership to understand


Owner retains all control – receives all income
Assets are included in owner’s estate
 Gross estate for federal estate tax purposes
 Generally also for probate purposes

Transferred during owner’s life for less than FMV
results in a gift and possible transfer tax.
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Question 1-1
Which of the following represents an advantage of
individual ownership?
A. The sole owner retains full control of the asset.
B. The sole owner must generally report all income
generated by the asset.
C. The sole owner must generally report part of the
income generated by the asset.
D. Individually owned assets seldom go through
probate.
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Joint Tenancy with Right of Survivorship
(JTWROS)
Property owned by two or more adults where, upon the
death of any owner, the property passes equally to the
surviving tenants.
 Each tenant deemed to own an equal, undivided
interest in JTWROS property.




Contribution is ignored
Each tenant has equal control
Income split equally among tenants
JTWROS supersedes a Will and thus the property
is not subject to probate
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Undivided Interest
What does “undivided interest” mean?

All tenants own a proportional piece of all assets
in the joint or other shared arrangement.
 Securities: ALL owners own a portion of ALL
securities in the portfolio.
 One tenant doesn’t own the good stocks while the
other owns the losers.

Real estate: ALL owners own a portion of all parts
of the property.
 One tenant doesn’t own the downstairs while the
other owns the upstairs.
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9
Question 1-2
Ken and Len own a two-stock portfolio in JTWROS.
The portfolio consists one half of Enron stock and one
half of Apple stock. Which is correct?
A. Ken may own all the Apple while Len owns all the
Enron.
B. Ken may own all the Apple while Len owns only a
right.
C. Ken and Len each own one half of Enron and Apple
respectively.
D. At the death of the first tenant to die, the portfolio will
be subject to probate.
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10
Estate Taxation of Spousal Joint
Tenancies
For spousal joint tenancies (JTWROS), one half of the
JTWROS property is included in the estate of the first
spouse to die.
 Tenancy must be exclusive (only spouses)
 Decedent’s half receives a step up in basis
 The survivor’s half retains its original basis (1/2).
 Example: Mr. and Mrs. buy 1000 shares of XYZ stock @
$20/share as JTWROS. FMV on Mr.’s death = $60 per
share. Mrs.’ basis = $40,000
½ $60 x 1,000 plus 1/2 of original $20,000
If Mrs. sells all shares at $80 per share, LTCG = $40,000
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Question 1-3
Step-up in basis is mainly about:
A. Federal estate tax
B. Income taxation to the decedent
C. Income taxation to the heir/beneficiary
D. Both federal income tax and federal estate
tax
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Estate Taxation of Non Spousal
JTWROS
For non-spousal joint tenancies, the ENTIRE value of
the JTWROS property is included in the estate of the
first tenant to die, unless:


The decedent’s PR can prove that the surviving tenants
furnished consideration to acquire the property
Otherwise, entire value included in first decedent’s estate,
and entire property receives a step up in basis.
 Example: Grandma bought property and named three
grandchildren as JTWROS owners along with herself.
At her death the property’s FMV is $240,000 – that full
amount is included in Grandma’s estate. Each
grandchild now has an $80,000 basis in the JTWROS
property.
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13
Tenancy by the Entirety (TBE)
Tenancy by the entirety (TBE) is a form of ownership
available only to spouses in which the consent of both
spouses is needed to dispose of the TBE property.



TBE assets are protected from the creditors of ONE
spouse but not from a joint creditor of both spouses
 May be desirable approach to homeownership
TBE dissolvable by:
 Mutual consent (both spouses)
 Divorce
 Death
For tax purposes, treated same as spousal JTWROS
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Question 1-4
Which statement below best reflects the comparison of
JTWROS versus TBE?
A.
B.
C.
D.
Both TBE and JTWROS are only spousal arrangements.
TBE generally offers better creditor protection than does
marital JTWROS
JTWROS property is seldom subject to probate while TBE
property usually is.
Both TBE and marital JTWROS continue beyond the death of
the first tenant.
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15
Tenancy in Common (TIC/JTIC)
Tenancy in common (TIC) is a form of ownership between two or
more adults carrying no survivorship rights.
 TIC parties are usually not spouses



Ownership interests are NOT necessarily equal
Each tenant may dispose of their interest freely by sale, by
gift, or at death


Siblings, children, friends, etc.
Decedent’s interest is included in the gross and probate estates.
Example: When sisters Terry and Sherry bought a
summer house, Terry furnished 75% and Sherry
furnished 25% of the purchase price. At Terry’s death
the FMV of the house was $200,000, so $150,000 of
value is included in her gross and probated estates.
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Question 1-5
Jack and Mack want to buy a fishing cabin for $100,000. Older
brother Jack has $60,000 to contribute to the purchase while
younger brother Mack has only $40,000 to put in. They plan to use
the cabin in proportion to their respective contributions to the
purchase. It appears that ownership of the cabin should be:
Tenancy in common
B. JTWROS
C. Community property
D. Fee Simple
A.
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Community Property
Community property is a form of ownership recognized
in 8 states under which each spouse is deemed to own
an undivided ½ interest in every asset.
 Subject to few exceptions, it is irrelevant which
spouse earned or acquired the property
 Generally, all property earned/acquired during the
marriage is community property
 Community property does not create a
survivorship interest


Survivorship can be created by contract
Otherwise, at death each spouse may give their half
interest as they please.
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Community Property States
The community property states are:
 Arizona
 California
 Idaho
 Louisiana
 Nevada
 New Mexico
 Texas
 Washington
 Wisconsin

Note: States other than community property states are
common law states.
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Exceptions to Community Property
In community property states, the following items are
not regarded as community property (also called
separate property) so long as not commingled:






Property acquired before the marriage
Income earned before the marriage
Gifts to one spouse
Inheritances by one spouse
Earnings on such separately received gifts or inheritances.
Note: Otherwise separate property or community property
arrangements may generally be changed by formal
agreement.
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Separate Property Example
While married to Jack in Wisconsin, Jill’s father
died last year leaving her $500,000 in bankissued Certificates of Deposit. The CDs will
earn $20,000 in interest in 2012.

BOTH the CDs and the $25,000 interest
income are Jill’s separate property, so long as
she does not retitle the CDs or commingle the
interest.
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Community vs. Separate Property
Examples
Property
Classification
Why
A computer your
spouse inherited
during marriage
Your spouse's
separate property
Property inherited by
one spouse alone is
separate property
A car you owned
before marriage
Your separate
property
A boat, owned and
registered in your
name, which you
bought during your
marriage with your
income
Community
property
Property owned by
one spouse before
marriage is separate
property
It was bought with
community property
income (income
earned during the
marriage)
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Community vs. Separate Property
Examples
Property
Classification
Why
A family home, which the
deed states that you and
your wife own as "husband
and wife" and which was
bought with your earnings
Community
Property
It was bought with
community property income
(income earned during the
marriage) and is owned as
"husband and wife"
A camera you received as
a gift
Your separate
property
Gifts made to one spouse
are that spouse's separate
property
A checking account owned
by you and your spouse,
into which you put a
$5,000 inheritance 20
years ago
Community
property
The $5,000 (which was
your separate property) has
become so mixed with
community property funds
that it has become
community property
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Question 1-6
Ben and Jen are a married California couple. Ben is a movie star.
Jen raises their twin girls. Ben just earned $1 million making a
movie and deposits that amount into a checking account registered
in his name only. Which of the following is true?
A. The $1 million is separate property due to the account
registration in Ben’s name only.
B. The $1 million is separate property because Jen did not
contribute to generating the income.
C. The $1 million is community property because all property of
California married couples is deemed community property.
D. The $1 million is community property because it was earned by
a spouse during the period of the marriage.
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Typical Community Property
 The following are typical types of community
property:



Income earned by one or both spouses during
the marriage
Separate assets commingled with community
property to the point where it can no longer be
determined which assets are separate
Appreciation on property owned by one
spouse where the efforts of the other spouse
contributed to its appreciation.
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Commingling Example
 Jill earns $25,000 in interest on CDs willed
to her (only) by her father. However, Jill
deposits such interest checks into an
account jointly owned with husband, Jack.

The $25,000 in interest thus becomes
community property.
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Spousal Effort Example
 Pam inherited a 20-unit apartment building from her
father. Her husband, Paul, manages the building by
seeing to the maintenance, collecting rents,
approving tenants and more. The building, worth
$500,000 when Pam inherited it, is worth $800,000
when Pam and Paul file for divorce.
 Due to Paul’s contribution, the building may be
regarded as community property for divorce and
other purposes. The court may deem Paul
entitled to half the appreciation.
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Migrating from Community
Property States
In general, property acquired as community
property in a community property state is not
automatically converted into non-community
property when moving to a common law state.
Community property retains its characterization
when the couple moves from the community
property state to a non-community property
state.
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Migrating From Common Law
States
If property is obtained by one spouse in a nonCommunity Property state, that property is considered
separate property. If the separate property is brought
with the couple when they move to a community
property state, then the property remains characterized
as separate.
 Separate property is not automatically converted into community
property just because the couple has moved out of a noncommunity property state to a community property jurisdiction.
Again, if the separate property is exchanged or sold for money,
then the property obtained will likely be considered separate
property the owning spouse.
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29
Quasi Community Property
Quasi-community property is property that is
obtained by a couple living in a common law
state that would have been shared property if
they were living in a community property state.
Quasi-community property is treated like
community property when the couple moves
into a community property state.

Quasi-community property is treated just like
community property when one spouse dies or
if the couple divorces.
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Quasi Community Property States
 The quasi community property states are:




Washington
California
New Mexico
Arizona
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Community Property Step Up In Basis
Unique to community property ownership is that upon
the death of the first spouse, the basis of the entire
community gets a step up to FMV at date of death.
 Example, Jack and Jill own as community property
stock originally acquired for $20,000. On the date
Jack dies, the stock is worth $100,000. The basis of
the stock “steps-up” to $100,000. Assuming Jack
leaves his interest to Jill, she can sell the stock for
$100,000 with no capital gain.
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32
Ownership in Trust
Trusts are entities that can own property.
 Trustee holds legal title to trust property.
 Beneficiaries hold equitable/beneficial ownership in trust
property.
 Trust may or may not be a separate taxable entity.
 Living (lifetime/inter vivos) trusts are made while the grantor
(settlor, donor, trustmaker) is living
 Generally revocable
 Testamentary trusts created per will instructions
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Question 1-7
Frank transfers $1 million to his new living trust.
From this information you can determine that
Frank is the:
A. Grantee
B. Grantor
C. Beneficiary
D. Fiduciary
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Interests In Property
“Property interest” refers to the extent of a
person's or entity's rights in property. It deals
with the percentage of ownership, time period of
ownership, right of survivorship, and rights to
transfer or encumber property
 State law creates property rights
 Federal law taxes the transfer of those rights
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Property Interests: Life Estate
A life estate arises when a person possesses all
the benefits of ownership in the property during
his or her lifetime (or the life of another) with the
property going to a remainder person after the
death of the life tenant.
 Contrast a “term interest” which extends for a
fixed term of years.
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Life Interest Example
Life Interest Example (life estate):
 Stu set up a trust under which his wife, Carol,
gets all trust income as long as she lives.
After Carol dies, the remaining principal
passes to Stu’s nephew.

Carol has a life interest.
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Remainder Interest
A remainder interest describes a future interest
in an asset. It may be a:
 future interest created by a trust;
 a contingent interest when a life tenant
surrenders a claim to an estate; or,
 a vested interest that becomes effective at a
specified future date.
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Remainder Interest Example
Stu set up a trust under which his wife, Carol,
gets all trust income as long as she lives. After
Carol dies, the remaining principal passes to
Stu’s nephew, Clark.
 Clark has a (future) remainder interest
 Carol has a (present) life interest.
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Vested Interest
 A vested interest is a right that so completely
and definitely belongs to a person that it
cannot be taken away without the person's
consent.
 ‘Vested’ means that the interest either
already is or will eventually belong to the
beneficiary.

If this occurs after the beneficiary dies, the
property will go to the personal
representatives of the beneficiary.
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40
Contingent Interest
Contingent interest refers to a future interest
which is uncertain and typically depends upon
the happening of an event.
 A contingent interest can only vest on the
happening of a specified event.
 Either the person who will enjoy the property,
or the occurrence of the event, will be
unknown and uncertain.
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41
Contingent Interest Example
Sidney makes a Will leaving his house to
whomever among his children marries first.
Sidney’s children thus have contingent
interests.
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Reversionary Interest
A reversionary interest includes a possibility that
property transferred during life, or by a decedent:
(1) may return to the transferor or to the transferor’s
estate, or
(2) may be subject to a power of disposition by the
transferor

Example: Hank places a house in trust for his
mother for life, then title reverts back to him on
her death. Under trust law, Hank has a
reversionary interest in the house.
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43
Present Interest
A present interest describes the right of a gift
recipient to have immediate possession or
enjoyment of the gifted property.

Example: Calvin gives his daughter, Callie, a
check for $7,500. She may do whatever she
likes with the money right now. Callie has a
present interest in the gift.

Note: Only present interest gifts qualify for the
annual gift tax exclusion.
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44
Future Interest
A future interest describes the postponed right
of use or enjoyment of property.


Often it is a right to property that may not be
enjoyed until some time in the future when a
certain event occurs.
A life estate often precedes the transfer of
property to another individual having a future
interest.
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45
Question 1-9
Barry establishes an inter-vivos trust under which he will
receive all income for life. Following his death, any
remaining trust principal will go to his daughter, Barbie.
Barry’s brother, Harry, is the trustee of this trust. Who
holds the future interest in this trust?
A. Barry
B. Barbie
C. Harry
D. Barbie and Harry
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46
Legal Interest
A legal interest generally describes a person’s
ability to manage and or distribute property rather
than benefit from it.
 Trustees of trusts and executors/administrators
of estates typically hold legal interests in the
trust’s or estate’s property.
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Beneficial (Equitable) Interest
Beneficial interest describes a persons current
or future benefit from property.
 Heirs of estates and beneficiaries of trusts
hold beneficial (equitable) interest.
 Note: One individual may hold both legal and
equitable interest in a trust.
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48
Question 1-10
The terms of Tony’s living trust entitle him to all trust
income. He also named himself trustee. At his death,
any remaining principal passes to his daughter, Tanya.
Which of the following types of interest or interests does
Tony hold in his trust?
A. Legal interest
B. Beneficial interest
C. Contingent interest
D. Both legal and beneficial interest
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Real Property
Real property describes all land, structures,
firmly attached and integrated equipment (such
as light fixtures or a well pump), as well as
anything growing on the land
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Question 1-11
Farmer Brown’s corn crop is:
A. Real property
B. Intangible real property
C. Personal Property
D. Contingent property (depending on harvest
outcome)
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51
Personal Property
Personal property (personalty) is generally any
property that can be moved from one location to
another.
 Personal property may be tangible or
intangible
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Tangible Personal Property
 Tangible personal property describes
property that can generally be moved (is not
attached to real property or land), touched or
felt. Examples:

Furniture, clothing, jewelry, art, writings, or
household goods.
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53
Question 10-12
Farmer Brown’s pigs are:
A. Real property
B. Intangible personal property
C. Tangible personal property
D. Tangible property only if they are
slaughtered while still owned by Farmer
Brown.
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Intangible Personal Property
 Intangible personal property or "intangibles"
refers to personal property that cannot
actually be moved, touched or felt, but
instead represents something of value.
Examples:

negotiable instruments, securities, service
(economics), and intangible assets including
chose in action.
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55
Question 10-13
When Janet inherited $1 million in AAA rated
corporate bonds from her grandmother she was
grateful for the bequest of this:
A. Real property
B. Tangible personalty
C. Cash equivalents
D. Intangible personal property
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