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Estate planning and taxes go hand in hand and need to be carefully considered while writing a will. There are different types of property ownership and each one has a different affect on inheritance taxes and speed of probate. Learning the best tax strategies for your situation can benefit your heirs down the road.
Forms of Property Ownership
Changing the form of property ownership for estate planning purposes is one way to avoid high inheritance taxes. Although there are no gift taxes for gifts that one spouse can give to the other, there are some taxes that apply if you give an interest in property to someone else such as your children.
Consider the tax characteristics when thinking about changing property titles.
- Joint tenancy. Joint tenants have the same undivided interest in the property. When one tenant dies, the surviving joint tenants own the property jointly. When all tenants but one dies, the last surviving tenant owns the entire property, and can do whatever he wants with the property (Ex. It can be gifted, passed on in a will or put into intestate if they die without a will).
- Tenancy by the entirety. This is a form of ownership between husband and wife in which the two spouses hold title to the whole property with the right of survivorship. When one spouse dies, the other takes title when the last remaining spouse dies. When the remaining spouse dies then the property is distributed according to his wishes in a will or it passes on intestate to heirs.
- Tenancy in common. This form of ownership allows each owner to hold an undivided interest in property. Your interest does not terminate upon death and the interest passes to your heirs as directed.
With a life estate, the owner of a property gives an interest in property to someone’s else (the life tenant) for the duration of that person’s life. When the life tenant dies, the interest in the property goes to another person the owner designates or back to the owner (if still alive). Note that conditions may be placed on the life tenancy. For instance, Sal may give Renee a life estate in his property for the duration of her life or until she marries.
Process for Changing Title
If property ownership changes through a will, the will has to be probated. The document showing how the property is distributed must be filed with the probate court and in the office of the recorder of deeds where the property is located.
Unified Tax Credit
Internal Revenue Code § 2010, otherwise known as the Unified Tax Credit (UTC), allows a certain amount of your property to pass to your heirs or beneficiaries without being taxed by the federal government.
You should consider re-titling property if the value of your combined property is over 2,000,000, so that the use of the UTC can be maximized upon a spouse’s death. This option only applies if you are married and each have a UTC of $2,000,000 for the year of 2008 or a UTC of $3,500,000 for the year of 2009.
Questions for Your Attorney
- What is the unified tax credit?
- What is the amount of the unified tax credit for 2008?
- Does a tenancy in common have a right of survivorship?
- What is the best property ownership for my situation?