Have you checked your title lately?

An ounce of prevention is worth a pound of cure. The form of title (or ownership) that you select for your assets is an area where that old saying rings loudly.

Ownership of property is a complicated matter that requires careful attention as your objectives change throughout your lifetime. The ownership form that you choose when you acquire property may serve you well at that time, but become outdated and contradictory to your objectives in later years.

For example, form of title can serve as a “will substitute.” That is, it can direct ownership to another person after an owner’s death. So, as a property owner, be cautious when you establish your form of title and also when you change your business or personal objectives. Let’s look at three examples of common titles and problems that can arise when a title does not agree with objectives.

Tenants in common

Frequent use: By two or more business owners that want their share of ownership to pass to their estate when they die, rather than to other surviving owners.

Example: A son, from a large farm family, chooses farming as his career. He and his father start a farming operation that is separate from Dad’s other land holdings. Dad funds most of the start-up business and his son builds “sweat equity” in the new operation where the two are partners. The other siblings in the family are not farmers. At the start of the new operation, Dad wants his share of the operation to go to Mom upon his death.

20 years later: The farm has grown into a large, thriving agricultural business. Dad has retired with independent income and assets. Plus he is no longer active on his own farm or his son’s operation. Dad’s objectives have changed as well. Now, the father and son “understand” that the business, which the son built and maintained, will belong to the son when the father passes away. However, both men either procrastinated about or overlooked changing their form of ownership.

Problem: A problem is brewing for the son because, after so many years, the father and son are no longer focused on their original form of ownership or on how the parents’ wills direct the transfer of assets. Since the father and son still own their farm as tenants in common, a significant portion of the son’s farming operation will flow back through his parents’ estate upon Mom and Dad’s death and be divided among the large group of siblings according to the parents’ wills. So much for the “understanding” between the father and the son.

Solution: The father and son should have changed their form of ownership on the son’s farm to joint tenants with rights of survivorship when their objectives changed. That is, when the farm became viable as the son’s business. That way the farm’s assets would go to the hardworking son upon the parents’ deaths. The remainder of the estate would still be divided among all siblings according to the parents’ will. This solution would have been a fair distribution to both “on-farm” and “off-farm” siblings.

Joint tenants with rights of survivorship (JTWROS)

Frequent use: Assets held as joint tenants with rights of survivorship pass immediately to a surviving owner by function of law even when wills and other written agreements direct otherwise. While this form of title would have solved the above problem, it created a problem in the following situation.

Example: A husband and wife start a small farm and dairy as a young couple. Their form of ownership is joint tenants with rights of survivorship, which is common among married couples.

35 years later: By retirement age, their business value is well beyond their expectations, which equates to estate tax exposure. They construct an estate plan with a credit shelter trust to preserve the individual estate tax exclusion upon the death of the first spouse. Great plan! When heirs are able to use both of their parents’ exclusions rather than only one, the estate tax savings is substantial.

Problem: If the ownership form (as joint tenants with rights of survivorship) is allowed to continue in this case, then the property will transfer to the surviving spouse upon the death of the first spouse. No property will be available to place into the credit shelter trust and the individual exclusion of the deceased spouse will be lost. A trust can not do the job it is created to do if there are no assets inside of it.

Solution: After signing an estate plan that uses a credit shelter trust, these married owners should have checked their ownership form to ensure that significant assets were titled as community property. That way, the property would have been available to place in trust after the death of the first spouse, rather than passing immediately to the survivor.

Trust ownership

Frequent use: Your property can be owned by a trust during your lifetime. Revocable living trusts are commonly used to avoid the probate process. Property held by a trust is passed on to heirs according to the terms of the trust agreement without the requirement of going through a state probate court. Great plan! Probate can be expensive, lengthy … and public.

Example: A successful ranching family owns property in three different states along with related equipment, livestock and an assortment of business assets. During an estate planning meeting with their attorney, the attorney advised the family to create a revocable living trust. That way, their property could pass to the next generation someday without going through probate.

Problem: The first generation parents of this successful ranching family pass away. While settling the estate, the family discovers that although a revocable living trust exists, the family property was never re-titled in the name of the trust. For that reason, the entire estate is now subject to probate. And since the property is owned in three different states, that means three different probates. Settling this estate will be a long and expensive process. In addition, the proceedings will be public record. A trust can not do the job it is created to do if there are no assets inside of it.

Solution: After signing an estate plan that uses a revocable living trust, these property owners should have re-titled their property in the name of the revocable living trust.

Does the form of title matter?

Absolutely. As you see by the examples above, no one form of ownership is appropriate for all situations. Your objective dictates what is best for you, and that may change at different stages of your life.

Be sure that your wills, trusts and general estate plan objectives agree with the way your assets are currently titled at your county recorder’s office. Resist the assumption that your attorney, CPA or anyone else took care of this for you. Double check this detail yourself by contacting the county recorder’s office where your property is located. Counties also have Web sites where you can usually check ownership without a fee or a trip downtown.

Which form of title is right for you?

Contact us at info@fcssw.com or 602.431.4150.for advice on which option makes most sense for you.

Equal Housing Lender - Equal Credit Opportunity Lender - Equal Opportunity Employer.

© 2000-2007 Farm Credit Services Southwest, ACA, PCA, and FLCA. All rights reserved.