A Message from Kimberly Clouse, Financial Expert:
I have worked in the financial services industry for nearly a decade in many capacities, most recently as a financial adviser for individuals. Over the course of my career, I have had the privilege of working with a diverse range of people, from the single mother just starting her own business to the dot.com billionaire. Based upon my experiences, I have learned that the same basic principles and lessons apply to a successful and healthy financial life, whether you’re starting out or cashing out. These guiding principles include simplicity, a long-term perspective, and above all, knowing that you have control of your financial destiny, and all the information you need is well within your reach.
Control Your Property’s Destiny
The way that someone owns property–both real and personal–affects the amount of control he or she has over the property. Therefore the particular type of ownership dictates whether or not the owner can give the property away and how ownership passes upon the owner’s death. For example, in community property states, husbands and wives have equal “claim” to assets and earnings generated during their marriage, regardless of who actually earned the money.
(Real property or real estate consists of land and anything anchored to that land, including buildings and even mailboxes. Personal property includes all tangible assets–such as furniture and jewelry–and intangible assets–such as stock certificates and copyrights–other than real estate.)
The following is a broad overview of the basic forms of ownership. State, rather than federal, law defines the various forms of ownership, so be sure to check with your accountant or attorney about the appropriate way to hold title in your individual situation.
- Joint tenants. A joint tenancy is created when two or more persons purchase or are given property simultaneously. Each joint tenant owns an undivided interest in the whole property and has the equal right to use, enjoy, and occupy the property. A common form of ownership is “joint tenants with rights of survivorship.” In this case, upon the death of one of the joint tenants, the property automatically belongs to the surviving tenants, and the property does not pass through probate1. For example, if a husband and wife maintain a JTWROS (“Joint Tenants With Rights of Survivorship”) account at a brokerage firm and the wife passes away, ownership will pass to the husband without having to go through probate. (Estate taxes might still be due however.)
- Tenancy by the entirety. Tenancy by the entirety is a form of ownership that, unlike joint tenancy, only applies to husbands and wives2. Under this form of ownership, if a couple owns property as tenants in the entirety, then either party must obtain the consent of the other co-owner to deal with the property in any way that would affect the rights of the other, such as mortgage. (The person with a co-tenancy by the entirety ownership lacks the power to freely dispose of that interest by will, and in this way, tenancy by the entirety is similar to JTWROS.) If the couple divorces, then the form of ownership automatically converts to tenancy in common.
- Tenancy in common. Tenancy in common (“TIC”) is the most common form of property ownership in most states. TIC is created when two or more persons own property together but also own separate titles in the property. There is no limit to the number of persons who can acquire property as TIC, and those persons do not need to be married to each other. At the death of one co-owner, ownership is included in the owner’s disposable estate and does not pass to the TIC co-owners. There is no right of survivorship in a TIC.
- Community property. Community property states–Arizona, California, Idaho, Nevada, New Mexico, Louisiana, Texas, and Washington–have special laws that dictate how married people own property. These laws affect real and personal property. In a community property state, the law provides that any property purchased or earned by a married couple during the course of their marriage is equally owned by each. If the wife earns $100,000 per year as an executive, while the husband earns $40,000 as a freelance writer, then each spouse “owns” $70,000. In addition to salary, property purchased by one spouse with money s/he earned during the marriage is also community property. Separate property, on the other hand, includes property received by gift or bequest and any property that one spouse owned before the marriage that s/he kept segregated from community property during the marriage. For instance, if the husband’s great aunt leaves him $1 million in her will, then the wife has no ownership interest in this bequest.
1. Probate is the judicial process whereby the will of a deceased person is presented to a court and an executor or administrator is appointed to carry out the will’s instructions.
2. Tenants by the entirety is only recognized in the following states: Arkansas, Delaware, District of Columbia, Florida, Hawaii, Maryland, Massachusetts, Mississippi, Missouri, Oklahoma, Pennsylvania, Tennessee, Vermont. Other states recognize tenants by the entirety for real estate only.
This column is designed to provide accurate and authoritative information on the subject of personal finances. It is provided with the understanding that the Author is not engaged in rendering legal, accounting, or other professional services by publishing this column. As each individual situation is unique, questions relevant to personal finances and specific to the individual should be addressed to an appropriate professional to ensure that the situation has been evaluated carefully and appropriately. The Author specifically disclaims any liability, loss or risk which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this work.