When developing and implementing a financial plan, it is important to consider where you are in life. As you do, you will become familiar with the three phases of financial planning: asset protection, asset accumulation and asset distribution.
Many hard-working people lose their assets during life and after death because they have not taken the time to properly title their property or they do not understand what the title entails. By way of example, I have a client who simply did not understand that the joint checking account she and her husband (prior to their divorce) owned gave him the right to withdraw all the money without her knowledge. By the time she found out, it was too late.
Depending on your objectives and the way in which you intend to ultimately transfer your assets, you should know the appropriate ownership forms. According to our legal system, you may have interests or ownership in three possible categories:
- Real Property includes land and anything permanently attached to the land such as buildings ,trees, and items permanently affixed to buildings.
- Tangible Personal Property consists of all property that is not real property (not affixed to the land and generally movable) and that has physical substance such as automobiles, furniture, appliances, clothes, jewelry, and other personal affects.
- Intangible Property is property that is not real property and is without physical substance such as bank accounts, stocks, bonds, patents, and copyrights.
State law classifies the interest an owner has in property based on how the asset is held — this is referred to as legal form of ownership. Customary among these legal forms of ownership are the following:
- Fee Simple Ownership is the complete ownership of property by one individual who possesses all ownership rights associated with the property, including the right to use, sell, gift, alienate, convey, or bequeath the property. The owner has the unrestricted right to transfer his/her ownership interest in the property during their lifetime (gift or sale) or at death (will). This is a very common way to own property.
- Tenancy in Common is an interest in property held by two or more related or unrelated persons. Each owner is referred to as a tenant in common. Tenancy in common is the most common type of joint ownership between non spouses. Each person holds an undivided, but not necessarily equal interest in the entire property. Each co-owner does not own a designated portion of the property, instead he/she owns an interest in the entire property. For example, if Anthony and Carla own a two-story home together, Anthony does not own the top floor and Carla does not own the bottom floor. Instead, they each own a percentage of the entire house, and both are entitled to use the entire property. Generally, each owner’s interest can be used, sold, donated, placed in trust, willed, or transferred via the state intestacy laws at the owner’s death. Tenancy in common does not imply an automatic right of survivorship. At the death of one tenant, the other does not automatically receive the decedent’s interest.
- Joint Tenancy with Right of Survivorship (JTWROS) is an interest in property held by two or more related or unrelated persons called joint tenants.Each person holds an undivided, equal interest in the whole property. Each joint tenant shares equally in the income and expenses of the property in proportion to his/her interest. A right of survivorship is normally implied with this form of ownership, and at the death of the first joint tenant, the decedent’s interest transfers to the other joint tenants. Because of this right of survivorship, joint tenancy is often called JTWROS. Unlike tenancy in common, co-owners may be liable for the debts of the other co-owners to the extent of the property held in joint tenancy. Therefore, a creditor of one co-owner may be able to seize the entire property to satisfy a debt of that particular owner.
- Tenancy by the Entirety)(TE) is very similar to joint tenancy between a husband and wife. To understand this form of ownership it is important to remember the following four key components:
- Tenancy by the entirety applies to joint ownership only between married couples.
- Neither tenant can sever their interest without the consent of the other tenant (spouse).
- Property ownership interest is automatically transferred to the surviving spouse upon death.
- TE may involve the ownership interest of either real or personal property.
- In most respects, tenancy by the entirety is simply a JTWROS that can only occur between a husband and wife.