Where an Asset Goes at Your Death Will Depend on How You Own it While You are Alive
When planning your estate, there are several types of plans you can use. One of the ways people plan is with how they own assets. This is referred to as title based planning. How an asset is owned will determine where and how it passes upon death. An asset may be held in a single individual’s name or it could be owned by multiple individuals. If an asset is held in the name of a single individual, at their death it is part of their “estate” and depending on the laws of that state, it may have to go through probate to pass to a living person. Who it will go to will depend on what the person stated in their will, if there is a will, or what state law provides if there is not a will.
If the asset is held by two or more persons, the question is whether or not the asset is held with rights of survivorship. The “right of survivorship” means that when one owner dies, that person’s interest in the asset automatically passes to the surviving owner(s) without the need of a probate. Some of the characteristics of property held with rights of survivorship are:
Each owner owns an undivided interest in the entire property.
The percentage of ownership is often undefined.
The interest automatically passes to the other owner(s) upon the death of an owner.
The deceased owner cannot direct their share of property.
It will still go to probate court on the death of the last surviving owner.
While some states, such as Utah, will imply rights of survivorship in the case of a husband and wife, that is not the case in every state. Many states, such as Idaho, require a deed of real property to a husband and wife to state whether it is held with rights of survivorship. This is true even when it is held as community property. In some instances, very specific language must be in the deed or other ownership documents.
While using rights of survivorship may seem like an easy way to avoid probate, as with most simple solutions, it has its drawbacks. For example, Bob wants to avoid probate, so he deeds his son Jim an interest in the family home as joint tenants with rights of survivorship. Bob tells Jim that upon his death the home should be sold, and the proceeds divided equally with Jim’s two sisters. Bob dies and Jim becomes the sole owner of the property immediately. Jim suffers a business setback and before Jim can sell the property, one of his creditors forecloses on the home to pay Jim’s debt. The sisters are powerless to stop the foreclosure.
If rights of survivorship do not exist, ownership is held in what is referred to as “tenants-in-common.” With tenants-in-common ownership:
Each owner owns an undivided interest in the entire property.
What percentage is owned is often undefined
The interest does not automatically pass to other owners upon death of an owner
The surviving owner does not have a say in who becomes the co-owner.
Assume that brothers Bob and Tom own farm ground as tenants in common. Each owns a 50% undivided interest. When Bob dies, his share passes to his five children in equal shares. Each child now owns a 10% interest and Tom continues to own 50%. Tom dies and leaves his share to his four children. There are now nine owners of the farm ground. Each cousin must approve any sale and any cousin could force a judicial partition of the ground.
No matter what kind of planning you do, the title is always king. So it is important to understand how an asset is owned and what the implications of that ownership will be upon an owner’s death. A trust, limited liability company, or a combination of both can be a great solution for ownership of most assets and as a way to ensure your objectives are met.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.