As important as creating your Will is, it is just as important to make sure that your property is titled correctly. Certain types of property may pass outside of your Will depending on how such property is titled and whether such has beneficiary designations. This article provides a summary of how property can be titled and how certain property can pass outside of your Will. To truly create a solid estate plan, you must understand and take into account how your property is titled and what type of property it is.
TYPES OF PROPERTY
All property can be classified as either real property or personal property:
A. Real property is land. Examples include a primary residence, a vacation home, investment real estate, a farm, a condominium, or any interest in land.
B. Personal property includes all property that is not real property and includes two types:
(1) Tangible personal property is property that has independent substance. Examples include furniture, jewelry, cars, or stamp collections.
(2) Intangible personal property includes personal property that has value, not for what it is, but for what it represents. Examples include stock certificates, bonds, promissory notes, contracts, or claims.
PROBATE VS. NON-PROBATE PROPERTY
A. Probate property is all property that, at death, transfers through a Last Will and Testament or if there is no Will then by intestacy. Probate property must go through the probate process to get to beneficiaries.
B. Non-probate property can be defined as all property that is not probate property. Non-probate property gets to the appropriate beneficiary at death, not through the probate court, but through other means.
Property can be owned in different ways and that helps determine how it transfers to beneficiaries and whether it is probate or non-probate property.
Examples of probate property (transferred to beneficiaries through a Will/probate) include:
⎫ Individually Owned Property (assets owned in the name of a single owner with no automatic transfer arrangements); or
⎫ Tenancy in Common Co-Ownership (assets owned as tenants-in-common with another).
There are several types of non-probate property:
⎫ Right of Survivorship Property (assets owned with another where the surviving joint tenant automatically takes full ownership without going through probate).
⎫ Contractual Property. Many types of property pass from one owner to another by virtue of a contractual provision, including:
(1) Life Insurance. The beneficiary of a life insurance policy receives the policy proceeds at death.
(2) Retirement Accounts with a Designated Beneficiary. The beneficiary named in an IRA gets the property at the death of the owner by virtue of the beneficiary designation. Governments dictate how (and when) some property is transferred, such as qualified retirement plans, which must pay benefits to a surviving spouse.
⎫ Revocable Trusts. Revocable trusts are the final way that property can pass from one individual to another without going through probate. This is why revocable trusts are used as a preferred means of transferring property.
Property With More Than One Owner
Beneficiary Designations allow you to name beneficiaries on certain accounts such as bank accounts, retirements accounts, mutual funds and any other financial account or investment you can think of. Sometimes you will hear the terms payable on death (“POD”) or transfer on death (“TOD”) which are forms of beneficiary designations. Typically a payable on death is for a bank account and transfer on death is for stocks or other securities. A beneficiary designation will control over anything contained in your Will. Therefore, if you said that one person was to inherit your bank account in your Will, but you also set up a beneficiary designation which named a different person to receive the account, then the person you named in the beneficiary designation will receive the account upon your death.
JOINTLY HELD PROPERTY
There are different ways that people can hold ownership together. For real property, this is determined by language in the deed conveying title to the property. For tangible property, it depends on how the account or certificate is titled.
⎫ Tenancy in Common. Tenants in common is the default way for two or more unmarried people to concurrently own real property. Each co-owner has an undivided interest in property. When one tenant in common co-owner dies, his interest does not pass automatically to the surviving co-owner. Rather, it is “probate property” and passes to the beneficiary through the probate court under the terms of the Will.
⎫ Tenancy by Entireties. This is a special method of joint ownership for spouses in which the surviving spouse automatically owns the entire interest in the property at the death of the first spouse. Not every state has tenancy by entireties.
⎫ Joint Tenancy with Right of Survivorship. When two or more people hold title to property as joint tenants with right of survivorship, each co-owner has an undivided interest in the property. At the death of the first joint tenant, the surviving individual automatically takes full title to the property. Many banks define all joint accounts as being owned this way. With regard to real property, the instrument creating the joint tenancy must specify that each co-owner will own the property with right of survivorship.
For tenancy by the entirety and joint tenancy, the surviving tenant becomes the sole owner of the property without the need for any probate proceedings. However, to document the passing of title to real property upon the death of a joint tenant, there are minimal filing requirements with the probate court of the county in which the real property is located. Also, the property may be subject to the rights of creditors holding unsatisfied debts of the deceased joint tenant (including state and federal taxing authorities).
Holding property jointly with survivorship rights can be a helpful form of estate planning, especially for smaller estates (where the total combined value of the husband’s and wife’s estates is under the single estate tax exclusion amount). It may also ease the administrative burdens of the death of a non-resident co-owner by minimizing the need for estate administration.
If you understand all of the above, you are well on your way to creating a complete estate plan.