Readers of Owner to Owner are familiar with the various types of business ownership, including limited liability corporations and family partnerships, but what about asset ownership outside of the business? While our business owner clients and their trusted advisors are experts at structuring corporate ownership of various share classes, real estate and other assets held under corporate umbrellas, many are much more passive when it comes to asset location within their personal balance sheets. For example, when a married couple begins putting together a personal balance sheet, the columns we frequently see are individual columns for each spouse, a column for the business and then a catch-all column usually labeled “joint” containing a laundry list of accounts and no additional detail. Clients with this type of balance sheet are frequently surprised to hear that many states allow up to three types of concurrent property ownership, so when someone says, “I would like to set up a joint account,” it begs the question, which is the best choice? That question is important, as each form of joint ownership serves different purposes, which may or may not make sense depending on the family’s goals, assets and liabilities.
Before jumping into more details on joint property ownership, it is important to clarify the different property classifications. Generally, property can be classified as real property, tangible personal property or intangible personal property. Digital assets – photo streams, Facebook accounts, mobile game currencies and so forth – are a work in progress, still being categorized and addressed. Real property is used to classify real estate, specifically land and anything affixed to it, and personal property is everything else that an individual owns. As the adjectives suggest, tangible personal property is physical in nature, while intangible personal property is not. Items such as jewelry and paintings would be considered tangible personal property. Intangible personal property is almost anything in one’s investment account: stocks, bonds, LP interests and so forth. Some property is titled – a house, a car or even the name on top of one’s investment statement – whereas other property is not. When titling an asset, it is critical to consider, preferably with the assistance of legal or tax advisors, the title that reflects an individual’s goals and desires with respect to the property at hand.
The five most common ways to title assets held outside of trust are:
- Sole Ownership: The complete ownership of property by one individual who possesses all associated ownership rights, including the right to use, sell, gift, alienate, convey or bequeath the property. An individually titled personal account is a good example. An asset owned in this way will pass through the owner’s probate estate at death.
- Tenancy in Common (TIC): An interest in property held by two or more related or unrelated persons. Each person holds an undivided, but not necessarily equal, interest in the entire property. Each owner’s share will pass through his or her personal probate estate at death.
- Joint Tenancy with Rights of Survivorship (JTWROS): An interest in property held by two or more related or unrelated persons. Each person holds an undivided equal interest in the whole property. Upon the death of the first tenant, that interest is transferred to the second tenant outside of the probate process.
- Tenancy by the Entirety (TBE): An interest in property held by two or more related or unrelated persons (though generally spouses). Each person holds an undivided equal interest in the whole property. Upon the death of the first tenant, that interest is transferred to the second tenant outside of the probate process. The ownership cannot be severed without the consent of both spouses/tenants.
- Community Property: A civil law statutory regime under which married individuals own an equal undivided interest in all property accumulated or commingled during their marriage.
Readers who had to read the middle three twice to hone in on the differences are likely not alone. While these differences can appear subtle, choosing the right title for the situation can result in significant benefits for the owners when it comes to features like creditor protection, probate and the unilateral authority (or lack thereof) of each tenant.