Module 1 — Probate & Taxes

One major goal of estate planning is the disposition of the estateholder’s property. Before discussing the tools and strategies available to the estate planner, some basic legal concepts must be defined. Different types of property and property rights are subject to different tax and probate treatment. From a legal perspective, property ownership is classified by:

• The extent of the owner’s interest in the property
• The physical characteristics of the property
• The number of owners
• Legal vs. beneficial ownership
• Present vs. future interests
• Vested vs. contingent interests

Extent of Ownership Interest

The law classifies the extent of property ownership interests into three main categories:

Physical Characteristics — Real vs. Personal Property

Number of Owners — Co-ownership

Property may be owned individually or co-owned. Commonly used forms of co-ownership include tenants in common, joint tenants with right of survivorship, tenants by the entirety, and community property interests. These are discussed in greater detail in the Methods of Transfer section (Page 4) and Module 2.

Legal vs. Beneficial Ownership

Fee simple ownership encompasses both legal ownership and full enjoyment of the property. However, these two aspects can be separated: one person may hold legal title (legal ownership) while another enjoys the benefits of the property (beneficial or equitable ownership). A trust is the most common vehicle for splitting legal and beneficial ownership — the trustee holds legal title while beneficiaries enjoy the property’s benefits.

Present vs. Future Interests

A beneficial interest in property may be a present interest — an immediate right to possess or enjoy the property — or a future interest, where the holder must wait until a specific time or future event before enjoying the property.

Two common types of future interests are:

Reversion — the property ultimately returns to the original grantor. For example: a son grants his widowed mother the right to live in his house for the rest of her life. The son retains a reversionary interest — when the measuring life ends, full ownership returns to him.

Remainder — a future interest belonging to someone other than the grantor. For example: the son grants his mother a life estate, and stipulates that upon her death the house passes to the American Red Cross. The Red Cross holds a remainder interest.

Remainder interests are either vested or contingent:

A vested interest is delayed only by the passage of time — nothing can stop the eventual transfer. In the example above, the Red Cross’s interest is vested because the mother will eventually die and the house will pass to it.

A contingent interest is a future interest that may or may not be fulfilled — it depends on the occurrence of a future event, not merely the passage of time. For example: the son grants his mother a life estate and stipulates that the house passes to his sister if she survives the mother, and to the Red Cross if the sister predeceases the mother. Both the sister and the Red Cross have contingent remainder interests.

Why These Distinctions Matter

In summary, property rights may take many different forms, and a single asset may be split into multiple distinct property interests — each held by a different party. In the examples above, the son simultaneously held legal title, while his mother held a present interest, and other parties held future interests.

These concepts have profound importance to the estate planner. Different property rights carry different values and are treated differently under both tax and probate law. Rearranging or separating ownership interests — through trusts, life estates, and other techniques — can significantly change how an estate is taxed and administered.