1. Types of Property Interests
Finance 553
Types of Property Interests

2. Types of Property Interests
Real Estate
Land
Permanently Attached to Land
Fixtures
Tangible Property – physical characteristics determine value of property
Intangible Property – physical characteristics do not impact value, only rights to cash flow

3. Types of Property Interests
How is property held in title
Who has use of property
How long does one have use of property
Can one transfer title of property
Without regard to others with interest
With agreement of others with interest
What are the issues with transfer in terms of
Timing
Taxes
What are the issues, concerns, or potential problems for a financial planner?

4. Types of Property Interests
Sole Ownership – Fee Simple
Ability to use, consume, dispose, or transfer is the exclusive right of the owner
Property is valued at fair market value for estate purposes
FACTS:
One owner
No automatic survivorship right
Included in probate (transfer of property via court after death of owner)
Real Property
If in state of residency, part of probate
If in state other than residency, subject to ancillary probate

5. Types of Property Interests
Fee Simple – Example
John owns a house under fee simple…
He can sell it at anytime
He can transfer it at anytime to another
Upon death is part of estate and subject to will (if specifically mentioned) or state inheritance rules if not in will
If John is married, does wife automatically get the house?
If John has children, do they automatically qualify for ownership or part ownership of the house?
Can John use the property for any purpose he so chooses?
What are the issues, concerns, or potential problems for a financial planner?

6. Types of Property Interests
Tenancy in Common
Two or more individuals own the property
Each has an undivided share in the property
Interests are not required to be equal
Most common form of “dual” ownership for non-spouse parties
Property interest owned outright, that is, property can be transferred to a third party without consent of other owner(s)
Co-owners not responsible for debts of other interests
FACTS
At least two distinct owners
No automatic survivorship feature
Interest included in estate at fair market value
Property can be severed if all interests agree or by court decree

7. Types of Property Interests
Tenancy in Common – Example
Alvin, Simon and Theodore own a commercial building
Original price of building $500,000
Alvin paid $250,000, Simon paid $175,000 and Theodore $75,000
Interests (shares) are, Alvin 40%, Simon 35%, Theodore 25%
Current fair market value $800,000
Is there a gift in the acquisition?
Simon falls into financial difficulty…
Can he sell his interest?
Does he need Alvin and Theodore to agree to new interest?
Theodore passes and via his will, passes ownership interest to daughter
What is the estate value of the property passed to daughter
What is the current value for Simon and Alvin
Theodore’s daughter does not want the interest, what are her options?

8. Types of Property Interests
Joint Tenancy with Rights of Survivorship (JTWROS)
Two or more individuals own the property
Each has an undivided share in the property
Interests are not required to be equal
At death of first joint tenant property passes automatically to surviving interests
Property interest owned outright, that is, property can be transferred to a third party without consent of other owner(s)
Co-owners may be liable for debts of other joint tenants (creditor may claim and receive entire property to settle outstanding debt)
FACTS
At least two distinct owners
Automatic survivorship feature
Interest included in estate at fair market value

9. Types of Property Interests
Joint Tenancy with Rights of Survivorship – Example
Florence, Mary, Diana, and Betty own a lake-side vacation home in JTWROS
Original price of vacation home $1,200,000
Each paid $300,000
Interests (shares) are equal 25% each
Current fair market value $2,700,000
Betty sells her interest to Barbara – what are the implications?
Barbara decides to sell but the three remaining buy the interest
At this time fair market value is $3,500,000
How much is the cost to each if they want to retain equal shares?
Diana wants out completely – what are her options?

10. Types of Property Interests
Tenancy by the Entirety
FACTS
Ownership of property by a married couple
Ownership cannot be severed without consent of the other tenant
Automatic survivorship to remaining spouse at death
Couple can change ownership structure
Usually to Tenancy in Common where individual interests are determined for the property
No gift tax triggered at change
Community Property States vs. Common Law States
Couples have equal undivided interests in all property acquired during the marriage other than inheritance
Commingled property usually becomes community property

11. Types of Property Interests
Tenancy by the Entirety – Example
Sonny and Cher are a legally married couple in a community property state
After the marriage they acquire a house, cars, personal property worth $3,000,000
Cher inherits a stock portfolio worth $200,000
Sonny buys a record label for $600,000 during the marriage with funds from his income
Cher wants to sell the stock and buy a new car, does she need Sonny’s approval?
Sonny and Cher break-up (and elect to divorce)
What is included in the estate of Sonny? Value of Estate?
What is included in the estate of Cher? Value of Estate?

12. Types of Property Interests
More on Community Property , Joint Ownership with Spouse
The basis of the law comes from Spain and is civil law in the following states:
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Wisconsin
Alaska allows individuals to enter into community property arrangements for in-state assets
Community Property does not usually carry rights of survivorship
Property can be divided interests when one spouse dies
California and Texas have rights of survivorship options
Common Law issues from common law states
Moving from community property – spouse may gift tax free
Moving to community property – all new acquisitions are community

13. Types of Property Interests
Partial Ownership Interests
Life Estate - Separate from Tenancy in Common
Party has rights for a limited period – Life Tenant
Rights to income or use of property while alive
Transfers to remaining beneficiary (remainderman)
Rights generally excluded from estate of Life tenant
Usufruct – Louisiana form of Life Estate
Term Interest
Party has rights to income or use of property for a defined period of time
At end of period property interests are transferred to remainderman
Legal vs. Equitable Ownership

14. Types of Property Interests
Partial Ownership Interests – Example
Bill owns a home but grants Bobby partial ownership interest that allows Bobby to live in the home until his death
The home is fee simple titled to Bill
The home’s current fair market value is $450,000
Bobby currently lives in the home with a partial ownership interest
Bill decides he wants to sell the property
Can he unilaterally terminate the partial ownership interest, sell the property and force Bobby to move out?
Can he sell the property with the partial ownership interest in tact?
Bill passes away, what happens to the property?
Bobby passes away and his son is living in the property with Bobby – does the son have any rights to stay in the home?

15. Types of Property Interests
Usufruct (In Louisiana)
Life Interest -- but with different terminology
Usufruct interest is the partial interest
Naked owners are the remaindermen
Usufruct can terminate at death or remarriage
Spouse has right to “house” while alive and terminates at death
Spouse has right to “house” while single and terminates at remarriage
Term Interest
Partial interest is defined for a specific and definite period
Can be for property use or income
Legal vs Equitable Ownership – equitable ownership only provides rights to use or enjoy economic benefits

16. Types of Property Interests
Summary of Ownership Interests
Types:
Fee Simple
Tenancy in Common
Joint Tenancy with Rights of Survivorship (JTWROS)
Tenancy by Entirety (Married Couple)
Partial Ownership Interest
Community Property States
Property acquired after marriage
Tenancy in Entirety without regards to contribution
Inheried property outside community property unless co-mingled.

17. Types of Property Interests
What are the implications for Financial Planning?
Assets need to be clearly titled prior to making wills, trusts, etc.
In a marriage, state of residency at time of acquisition may be important
For wills, property transfer requests must be consistent with ownership interests
Transferring property into a trust must meet legal requirements to transfer assets based on ownership rights
Untitled property may be listed in wills or trusts but all parties to the document (will or trust) must agree
Other issues?