Property Ownership: Title Options
Ownership Options May Be More Extensive Than You Think

When creating an estate plan, there are many important considerations to take into account, one of the most important of which is how title to assets should be held. Every day, individuals title assets without much thought as to how their decisions will affect their ability to deal with those assets in the future and in their estate plan. The wrong type of ownership can easily undermine the most carefully prepared estate plan.

The way an asset is titled has serious implications as to the amount of control the owner will have over that asset during life, as well as to how the property will pass after death.

This article will review the most common forms of asset ownership by individuals in North Carolina and their estate planning implications by looking at the primary forms of ownership, which are divided into two major categories (sole ownership and concurrent ownership), as well as living trusts as an alternative to these forms of ownership.

Sole Ownership

When sole ownership of an asset is maintained, the owner has complete title and control over that property. Any decisions on how to dispose of the asset during lifetime or after death are those of the owner alone (except with respect to real estate owned by a married person‹in such cases, the non-titled spouse must nevertheless sign the deed if the titled spouse wishes to sell the property).

Maintaining complete ownership of an asset is simple and easy and gives the owner the most flexibility when developing and funding his or her estate plan. However, upon death the full value of all solely owned assets will be considered part of the owner's estate and be subject to death taxes as well as having to go through probate, unless the asset is subject to another type of agreement that avoids probate, such as an insurance policy with a named beneficiary.

Concurrent Ownership

When two or more people share ownership of an asset, the property is said to be owned concurrently. North Carolina recognizes three basic forms of concurrent ownership, and each has its own requirements and consequences.

(1)Joint Tenancy with Right of Survivorship (JTWROS)

This is a commonly recognized joint ownership arrangement, viewed by many people as the primary way to ensure that their assets will automatically pass to the intended beneficiary without passing through probate. Joint tenancy with right of survivorship allows an asset to be held by two or more individuals, including spouses, parents, children, siblings or business partners with legal ownership and control of the property being shared equally by the co-owners. At the death of the first joint tenant, ownership and control of the asset automatically transfers to the remaining joint tenant.

In order for property to be held in this fashion, the joint tenants must:

• Own the same fractional interest in the property;

• Have acquired the interest under one contract;

• Have acquired the interest at the same time; and

• Share simultaneous rights to the property.

When title to an asset is held in JTWROS, each of the joint tenants has an "undivided interest" in the property, meaning that each joint tenant is considered to own the entire physical asset, or, in the case of an investment account, all of the securities in the account. However, while each joint tenant owns the entire physical asset, he or she owns only his or her fractional share of the asset's value.

JTWROS is one of the most common forms of concurrent ownership but is not always the best choice. One potential hazard is that both joint tenants have the right to dispose of their respective ownership interests, sometimes without each other's consent. If necessary, each joint tenant also has the right to seek "judicial partition" of the asset (in other words, to ask the courts to force the division of the property). Furthermore, the creditors of either joint tenant can make a claim against his or her interest in the jointly owned asset, should he or she have financial difficulties or be forced to declare bankruptcy. In either event, the asset might have to be physically divided, if possible, or sold.

In addition, the creation of a JTWROS may result in unintended death tax consequences because at the death of the first joint tenant to die, the property passes to the surviving joint tenant by operation of law and cannot be passed by will.

Moreover, with JTWROS, the ultimate sole owner of an asset might not be the individual intended. For instance, if a gift is made to two children as JTWROS, with the intention that the property ultimately be divided equally among the children's children, the donor could be disappointed, because the property will automatically go to the surviving child when one child dies, leaving nothing for the deceased child's heirs. The same could be true in the case of a married couple each of whom has children from a previous marriage. Any assets the couple holds as JTWROS could potentially pass to the children of the second spouse to die, leaving nothing for the children of the first spouse to die.

(2)Tenancy by the Entirety

Another form of concurrent ownership available in North Carolina is tenancy by the entirety. Available only to married couples, and covering only real estate, tenancy by the entirety shares many of the characteristics of JTWROS. However, unlike JTWROS, in which each tenant is considered to own all of the physical asset but only a fractional share of the asset's value, in a tenancy by the entirety, the husband and wife are each considered to own equally all of the physical asset and all of its value. As a result, neither spouse's creditors, may claim any of the property. In addition, just as with assets owned as JTWROS, property held as tenancy by the entirety precludes tax planning because it bypasses probate and precludes any disposition by will since the surviving spouse's right to ownership is created by operation of law.

(3)Tenancy in Common

Tenancy in common is the prevalent form of co-ownership between unmarried individuals; however, married couples frequently use tenancy in common as a part of their estate and tax planning. With this form of ownership, each of the co-tenants owns and controls an undivided interest in the asset. The amount of each individual's interest can vary but is usually proportional to the number of co-tenants (although tenants can own unequal shares). For example, let's assume you and two friends buy a boat. Each of you contributes one-third of the cost of the boat and, thus, is entitled to one-third ownership and control of it.

An important feature of tenancy in common is that each co-owner may sell, give away or otherwise dispose of his or her respective ownership interest in any manner he or she chooses, including disposition by will. Other co-owners have no right or claim on a co-owner's share of the asset unless he or she transfers it to them. However, creditors of any of the co-tenants can stake a claim. Further, any co-tenant may seek a judicial partition of the asset into individual pieces, potentially requiring the asset to be sold and the proceeds divided up among the tenants.

While this lack of a survivorship feature allows a co-owner to control what happens to his or her ownership shares at death, it will not protect his or her share of the asset from probate. A co-tenant's share of the property will become an asset of his or her estate rather than being transferred to the surviving tenant automatically, and the surviving tenant's share will remain unaffected by the death of the co-tenant.

Living Trusts

Many people have opted to establish a trust as a way to simplify their estate planning efforts and avoid probate. Many different types of trust exist, but one of the most commonly used is the revocable living trust. It may be established and modified at any time during the grantor's life.

When a living trust is established, title to the assets intended for the trust are transferred to the trust during the grantor's lifetime. This type of living trust is fully amendable and revocable so that complete control is retained over the assets and the terms of the trust itself during your life. You may stipulate when and under what circumstances your assets will pass to your heirs after your death. The trust becomes irrevocable only after your death. Because the assets are then held by the trust as the sole owner rather than by the grantor personally, they are protected from probate and the terms of the trust will govern the disposition of the assets. However, because the trust is revocable, it provides no additional protection from death taxes, and creditors can make a claim against the trust assets.

Which Is the Best Ownership Choice?

While the way assets are titled is not the only consideration in estate planning, a clear understanding of its significance and relevance can help you determine whether your current practices are appropriate. JTWROS or tenancy by the entirety may simplify transfer of property at death; however, such types of ownership may prevent use of the property in tax planning. Sole ownership or tenancy in common on the other hand may make transfers to beneficiaries subject to probate; however, tax considerations may make it necessary for the property to be owned in sole ownership or tenancy in common.

Thomas L. Norris, Jr.

The purpose of this Web site is to provide general information about legal developments. Because the facts in each situation vary, any legal precedents noted may not be applicable to individual circumstances. This information is not offered as legal advice.