What happens to your property when you die depends on various components of your estate plan. Estate planning can be a complicated process with numerous factors to be considered and decisions to be made. But all of those factors boil down to one common denominator: how your property is titled.
Understanding who owns what is the key to creating a good estate plan. Even the most sophisticated and well-thought-out plan will fail if you don't understand how your property is titled. It might pass directly to beneficiaries by operation of law, or it might require probate.
You might not have a right to bequeath an asset at all in some cases, such as if you hold title to a property jointly with rights of survivorship.
How Property Ownership Impacts Estate Planning
Property is titled according to one of three basic concepts: sole ownership, joint ownership, or title by contract. Assets can only be titled in one of these three ways, but each can include one or more variances.
Sole ownership means that a property is owned by one person in their individual name and without any transfer-on-death designation. Examples include bank accounts and investment accounts held in one individual's name without a "payable on death," a "transfer on death," or an "in trust for" designation.
A property is titled in one individual's name in "fee simple absolute" in real estate. The individual owns 100% in their sole name, with title being transferred to someone else at the time of the owner's death.
Joint Ownership With Right of Survivorship
Joint ownership can come with right of survivorship or without it.
Joint ownership with right of survivorship means that two or more individuals own the account or real estate together in equal shares. The surviving owner or owners continue to own the property after one owner dies. They automatically inherit the deceased's share by operation of law.
For example, John and Mary would each own half the property if they were joint tenants with Joe, and if Joe were to predecease them. John, Mary, and Joe would each have owned 33.3% before Joe's death. John and Mary would each inherit 16.65% ownership from Joe, so now they would own 50% each.
No joint owner can bequeath their share of the property to anyone else. The co-owners have a legal right to it when a joint owner dies.
No owner can sell the property or encumber it with liens or mortgages without the consent of the other(s), although they can sell or encumber it jointly.
Tenancy by the Entirety
“Tenancy by the entirety" is a special type of joint ownership with rights of survivorship between married couples. It's recognized in most states that don't observe community property law, but not all. Each spouse has an undivided interest. Neither spouse can transfer, encumber, or bequeath the property without the other's consent.
"Community property" is another special type of joint ownership reserved for married couples in nine states: Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin. This type of ownership does not necessarily come with survivorship rights.
Spouses can leave their 50% ownership to anyone they want when they die if they bequeath it in their estate plan, but the property will go to the surviving spouse if they fail to do so.
The last surviving owner is free to do whatever they want with the property in community property states, assuming the decedent hasn't bequeathed their share to someone else.
Tenants in Common
Joint ownership without rights of survivorship is typically referred to as owning the property as "tenants in common." Two or more individuals own a specific percentage of the account or real estate, but not necessarily equal shares. One individual might own 80%, while a second individual owns 20%.
Joint co-owners can pass their shares to beneficiaries under the terms of their wills or other estate plans in this type of deed. Probate would be necessary to transfer the asset.
Title by Contract
"Title by contract" refers to assets that bear a beneficiary designation that names an individual or individuals to receive them after the owner dies. This type of title includes bank accounts or investment accounts that have a "payable on death," "transfer on death," or "in trust for" beneficiary designation.
Title by contract also includes life insurance policies that have designated beneficiaries, as well as retirement accounts such as IRAs, 401(k)s, and annuities. Life estate deeds designate a "remainderman" to inherit real estate in this way, and transfer-on-death or beneficiary deeds also have designated beneficiaries for real estate.
Where Property Goes After the Owner's Death
Property is either a probate asset or a non-probate asset, depending on how ownership is held.
Non-probate assets don't have to go through the court-supervised probate process after the owner dies, because there's already a means in place to move the asset from the ownership of the deceased to living individuals. Other owners or beneficiaries take control of the deceased owner's assets by operation of law simply because they survived the deceased owner.
Non-probate assets include assets owned jointly with right of survivorship, including tenancy-by-the-entirety property and some community property. They include any type of asset that has bears a beneficiary designation to transfer it after the owner dies.
When Assets Go Through Probate
As the name suggests, probate assets must go through a court-supervised probate process after the owner dies, because probate is the only way to get the asset out of the deceased owner's name and into the names of the beneficiaries. Probate assets include sole-ownership property, tenants-in-common property, or any other asset owned jointly without right of survivorship.
Who inherits probate assets depends on whether the owner has left a last will and testament. The terms of the last will and testament should dictate beneficiaries if the owner left one. Otherwise, the intestacy laws of the state where the owner lived at the time of death will determine who inherits the owner's assets, as will the intestacy laws of any other state where the owner owned real estate.
Laws for intestate succession typically begin with the surviving spouse, then consider direct descendants. More distant relatives rarely inherit unless the deceased's spouse or children are no longer living, or if the deceased never married or had children.
Putting It All Together
- You'll be left with an estate plan that will confuse your loved ones and possibly have them haggling in court if you don't take all these rules into consideration.
- Go over each one of your assets, and take note of who owns what and who the designated beneficiary is, if applicable.
- Speak with an attorney if you have any doubts.