Module 2 — Planning Tools

Under common law, property owned by two or more persons is a joint tenancy. There are several co-ownership arrangements — each conveying different lifetime and survivorship rights. Some states impose community property laws on assets owned by married residents, in effect creating jointly owned property by operation of law.

Tenants in Common (TIC)

In a tenancy in common, each co-owner holds an undivided, fractional interest in the entire property. Unequal fractional interests are permitted. Without a written agreement between co-owners, each holds an equal interest, shares equally in income and expenses, and is equally responsible for liabilities.

Key features:

• Any co-owner may transfer his or her interest to someone else without the other owners’ permission (unless they have mutually agreed otherwise). The new owner becomes a co-owner with the remaining tenants.
• A co-owner’s share can be attached by that co-owner’s creditors.
• Disposal of the entire property requires consent of all co-owners.
• No survivorship right — upon a co-owner’s death, the deceased’s share passes into their estate, subject to probate. Tenancy in common is not a will substitute.

Advantage: each co-owner’s heirs are protected — the interest passes to the deceased owner’s estate, not automatically to the surviving co-owner.

Disadvantages: subject to probate and estate taxation; creditors may attach a co-owner’s interest; shared control can cause practical problems in administration and disposal.

Joint Tenants with Right of Survivorship (WROS)

Joint tenancy WROS offers many of the same lifetime rights as tenancy in common — equal control, income, expenses, and liabilities. The critical difference is survivorship: upon a co-owner’s death, the remaining co-owner(s) automatically assumes full ownership. The decedent’s share does not pass to their estate or heirs. This makes WROS a popular will substitute.

Estate Tax Treatment

• Spouse as co-owner: one-half the property’s value is included in the decedent’s gross estate. Since it automatically passes to the surviving spouse, it qualifies for the marital deduction — effectively passing estate tax-free (though the full value will be taxed in the surviving spouse’s estate).
• Non-spouse co-owner: the IRS presumes the first co-owner to die owned 100% of the property. Unless the surviving owner can prove the extent of their financial contribution, the entire value is taxed in the first decedent’s estate. This is the consideration furnished test. Accurate record-keeping is essential for WROS property between unmarried owners (e.g., parent and child).

Step-Up in Basis

For income tax purposes, the cost basis of inherited property is the fair market value at the date of death — the stepped-up basis. Under WROS between two co-owners, the surviving owner effectively inherits one-half the property. The surviving owner’s total cost basis is one-half the original cost plus the stepped-up basis on the inherited half.

Planning Considerations & Drawbacks

• Avoids costs and delays of probate — property passes quietly and privately to the survivor
• During their lifetimes, co-owners lack absolute control — all must consent to dispose of the property
• If co-owners die simultaneously, the property splits between both estates and is subject to probate
• If the estate plan relies on WROS to pass property to a spouse, the first spouse’s estate may underutilize its unified credit — leaving the surviving spouse’s estate subject to heavier taxation than necessary
• Retitling individually held property into joint name may trigger gift tax liability (e.g., a father retitling property into joint ownership with a daughter without compensation gives a taxable gift of one-half the value)

Tenants by the Entirety

Available only to married couples in states that recognize this form of ownership. It operates like WROS but adds the protection that neither spouse can transfer or encumber the property without the other’s consent. For estate and gift tax purposes, tenancy by the entirety is treated the same as WROS. Florida recognizes tenancy by the entirety.

Community Property

Nine states impose community property laws on property owned by married residents. Community property law divides marital property into two categories:

• Community property — any property acquired by the couple during the marriage while residing in a community property state. Each spouse owns one-half. Community ownership continues even if the couple later moves to a common-law state.
• Separate property — property owned before marriage, or received as a gift or inheritance during marriage. Separate property may be reclassified as community property (and vice versa) by mutual agreement, but reclassification has gift tax consequences.

Upon the death of one spouse, one-half of the community property passes to the survivor; the other half is subject to probate and the taxable estate. For estateholders who have ever resided in any community property state, it is critical to determine the exact status of all property in the estate and the state law governing its disposition.