Yours, Mine and Ours: How Spouses Share and Transfer Property
For most married couples, the cornerstone of estate planning is transferring their most significant asset: their home. So teams must be aware of the many roads this process can take.
Married couples who own real property together have many options when deciding how to share the asset. Traditional approaches include joint tenancy, tenancy in common, tenancy by the entirety, and community property. All have advantages and disadvantages.
Joint tenancy is a form of concurrent ownership where each owner has an equal interest in the property. It is also available to unmarried couples, though I will focus on married couples in this article.
Arguably, the most helpful feature of a joint tenancy arrangement is the “right of survivorship.” When the first spouse dies, their stake in the property passes directly to the surviving spouse, without the need for probate administration. During probate, a court determines the validity of the decedent’s estate documents and helps to settle any claims against the estate before the property is distributed to the heirs. Avoiding this process can save the beneficiary of an estate substantial costs and time. The surviving spouse also gains additional privacy by preceding probate since the probate process is a matter of public record.
Tenancy in common usually does not have the right of survivorship. However, it allows other customizations and offers greater flexibility. As in joint tenancy, tenants in common do not have to be married; unlike in joint tenancy, tenants in common may hold unequal interests in the property. Residence in common is not dissolved when one of the tenants dies, either. If John and Jane are tenants in common, each with a 50 percent interest in their property, John can bequeath his 50 percent to their son John Jr., and Jane’s claim will remain unaffected.
Tenancy by the entirety is available only to married couples, though Hawaii and Vermont offer options for domestic partners and those in civil unions, respectively. It is as if the property is owned by a single entity (the couple) instead of two parties for legal purposes. Neither party can dissolve the tenancy without the other’s consent, except in cases of divorce or annulment. Like joint tenancy, living by the entirety offers a right of survivorship, allowing the surviving spouse to avoid probate. It can also shield the property from creditors of one spouse only, though not from creditors to whom the couple is jointly in debt. Not all U.S. jurisdictions recognize tenancy by the entirety.
Community property laws exist in only nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In Alaska, couples may enter into community property arrangements but must do so by signing agreements or forming a trust. The validity of such structures is still untried on a federal level, though, and it is not clear whether the Internal Revenue Service will honor them for federal tax purposes.
Although the specifics of community property laws vary from state to state, the basic idea is the same. Like tenancy by the entirety, community property is an option only for married couples. Generally, any property acquired by either spouse during the marriage becomes community property unless it is a gift or an inheritance. Property owned before the wedding is also excluded. Spouses may enter into agreements, such as prenuptial or postnuptial arrangements, that preclude otherwise eligible property from being subject to community property laws or which convert separate property to community property.
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