By The Burton Law Firm
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The tenancy in common (TIC) can be a very useful form of co-ownership. Tenancies in common are the “default” form of joint property ownership in California, so if the title documents do not specify a different form of joint ownership, it is generally presumed that a tenancy in common exists. However, a person who owns land outright may create a TIC in order to pass the property to another person for estate planning purposes.
Features of Tenancies in Common
A tenancy in common is one way of taking title to real property. In a TIC, multiple owners each hold title to an undivided interest in the whole property. Each owner has a right to use and enjoy the entire property. So if one owner holds 1% of the entire title, that owner may utilize the entire property for his business. However, that owner may not destroy or ruin the value of the land or its utility for other co-owners. If he or she does so, that owner may be liable to the other co-owners. Tenants in common do not have a right of survivorship with one another. Thus, if one co-tenant dies, the deceased co-tenant’s interest passes by testamentary instrument or operation of law to the co-tenant’s beneficiaries or heirs. The other co-tenants do not automatically acquire the interest, as would occur in a joint tenancy with right of survivorship.
TICs in Estate Planning
TICs can be used as an estate planning device. In this context, TICs let a donor transfer a low-value interest in high-value property to another person during the donor’s lifetime. With careful planning, this can reduce the donor’s taxable estate at death while minimizing gift tax consequences during life.
The TIC works in the following manner. The donor already owns a piece of property and wants to pass it on, usually to a family member. The donor would give a tenancy in common interest to a new owner (the donee). A tenancy in common interest is not as valuable as a fee simple interest in the entire property due to the reduced marketability of the interest, the limited freedom of use of the property, and potential limitations on transferring the interest to a third party. By creating a tenancy in common interest valued under the annual gift tax exclusion amount, the donor may transfer the TIC interest without incurring gift taxes. And since the value of the gift is lower than the value of the piece of property actually transferred, the donor is removing a large portion. Therefore, the donor transfers a low-value interest in a high-value property.
For a rough example, assume that D wants to transfer a TIC interest in real property to D’s grandchildren. The property is worth $250,000. D creates ten TIC interests, one for each grandchild, and ensures that each interest has a discounted value equal to the annual gift tax exclusion amount ($12,000 in 2007). D gives all ten interests to the grandchildren, which totals $120,000 in gifts. But due to the devaluation of TIC interests, the ten TIC interests actually dispose of a much higher value of property, perhaps around $180,000. Therefore, D has reduced his taxable estate by $180,000 while only making $120,000 in gifts and not incurring any gift tax. Using the TIC has allowed the donor to pass on property which has been assigned a greatly discounted value.
There are some disadvantages to using a TIC, however. First, the donor gives up control over the portion of the property transferred as a TIC interest. If the donor desires the interest back, he or she must purchase it from the donee. Second, once the donee receives his or her interest, the donee is free to treat the property as the donee sees fit. The donee could use the property for a purpose not intended or even contemplated by the donor. Third, the donee is free to transfer the TIC interest to a third party. This could prove a rude surprise for the donor, who no longer is dealing with a trusted donee, and instead must now deal with a complete stranger. Fourth, the donee could sue for partition of the property and a court could order that the property be either physically separated, with each co-tenant receiving his or her share and dissolving the tenancy, or that the property be sold and the proceeds divided according to the respective interests of the co-tenants. Finally, the donor may recognize taxable gain on the value of the property transferred to the donee, and thus gift taxes may be owed. However, by utilizing the annual gift tax exclusion amount, this need not be of great concern to the donor.
You should speak with an attorney before creating a tenancy in common to serve your tax or estate planning legal needs. Although a TIC might be right for your situation, other legal options will often provide greater flexibility for you and your family while still meeting your planning objectives.
For a more in depth review of this subject, please see: www.lawburton.com, news/resources.
The Burton Law Firm
555 University Avenue, Suite #275
Sacramento, CA 95825
Phone: (916) 570-2740 Fax: (916) 570-2744