The process of developing an estate plan involves knowing what type of property you own and the type of ownership interests held. The two basic categories of property are Real and Personal.
Real property is land and anything permanently attached to it. Permanent attachments include buildings, trees and crops. A mobile home is not considered real property because it can be easily transported to another location.
Anything that is not real property is personal property. Personal property can further be defined as either tangible or intangible property.
- Tangible property is property with intrinsic value and can be seen, touched and felt. For example,
- cars, jewelry or coin collections are tangible property.
Intangible property is property that is represented by a physical object that has no intrinsic value.
- An example of this is a stock certificate. The certificate itself is a piece of paper that can be replaced. The value of the certificate is derived from the company it represents.
Property can be owned in different forms. An individual may have a present or future ownership interest in property.
Ownership Interests of a Present Interest
- Sole Ownership (Fee Simple Estate): A fee simple estate represents an individual’s absolute ownership in property. An individual who owns a house outright has the right to keep, sell or give away the property during lifetime or death.
- Joint Tenants with Rights of Survivorship: Property that is owned by two or more individuals equally. At the death of one owner, the interest passes equally to surviving owners.
- Tenancy in Common: Property that is owned by two or more people concurrently. Ownership in the property does not have to be equal. At death, each individual’s share of the property passes to their heirs according to terms of a Will, rather than to the surviving tenants.
- Tenancy by Entirety: This form of ownership applies only in a case where the joint holders are husband and wife. Neither party can dispose of their share of the property without the consent of the other.
Ownership Interest of a Future Interest
- Life Estate: A life estate is limited ownership in property. This estate can be measured by the term of an individual’s life or the life of someone else. For example, under the Will of Client A, Client B has the right to use Client A’s house for the remainder of Client C’s life. At Client C’s death, Client B’s right to use the home will cease and may be passed to someone else.
- Estate for Term of Years: Estate for term of years is ownership interest in property for a set duration of time. Ownership may be specified for a number of months or years. At the end of the term, the owner owns nothing, and the property could pass to someone else.
- Remainder Interest: A remainder interest in property is the right to use property at a future time. This remainder interest goes into effect when a present ownership interest ceases. Remainder interests may be vested, meaning an individual has an absolute right to use the property at a future date; or conditional, meaning an individual has the right to use the property based on something happening. For example, under the Will of Client A, Client B is allowed to use Client A’s house only if Client C predeceases Client B. Should Client B predecease Client C, the interest may pass to someone else.
- Reversionary Interest: This occurs when a property ownership ceases and reverts to the grantor.
It is important to be aware of your current forms of property ownership as current gift and estate tax laws can affect your tax liability. It is also important to speak with an estate planning attorney and tax professional to ensure you are using the best option for the distribution of your property after death. For more information regarding this topic, please contact Henssler Financial at 770-429-9166, or [email protected]