If you hold significant real estate investments, tenancy-in-common (TIC) ownership can be a powerful, versatile estate-planning tool.
Let’s take a closer look at a few common questions regarding this strategy.
What is tenancy-in-common?
A TIC interest is an undivided fractional interest in property. Rather than splitting the property into separate parcels, each owner has the right to use and enjoy the entire property. An individual TIC can’t sell or lease the underlying property, or take other actions with respect to the property as a whole, without the other owners’ consent. But each owner has the right to sell, mortgage or transfer his or her TIC interest. This includes the right to transfer the interest, either directly or in trust, to his or her heirs or other beneficiaries.
Someone who buys or inherits a TIC interest takes over the original owner’s undivided fractional interest in the property, sharing ownership with the other tenants in common. Each TIC interest holder has a right of “partition.” That is, in the event of a dispute among the co-owners over management of the property, an owner can petition a court to divide the property into separate parcels or to force a sale and divide the proceeds among the co-owners.
How is it used in estate planning?
Here are a few of the ways TIC interests can be used to accomplish your estate planning goals.
- Distributing your wealth. If real estate constitutes a significant portion of your estate, dividing it among your heirs can be a challenge. If you transfer real estate to your heirs — your children, for example — as joint tenants, their options for dealing with the property individually will be limited. What if one child wants to hold on to the real estate, but the other two want to cash out? Transferring TIC interests can avoid disputes by giving each heir the power to dispose of his or her interest without forcing a sale of the underlying property.
- Reducing gift and estate taxes. Fractional interests generally are less marketable than whole interests. Plus, because an owner must share management with several co-owners, they provide less control. As a result, TIC interests may enjoy valuation discounts for gift and estate tax purposes.
- Equalizing estates. Historically, an important estate planning strategy for affluent married couples was to “equalize” their estates. In other words, if one spouse owned a disproportionate amount of the couple’s wealth, transferring assets to the “poorer” spouse could significantly reduce their estate tax bill. Why? Because if the poorer spouse died first, his or her exemption would be wasted. If the “richer” spouse’s estate exceeded his or her exemption amount, the excess would be exposed to estate taxes.
Higher exemption amounts and portability of exemptions have made estate equalization less important than it used to be. But if you and your spouse have wealth that substantially exceeds your combined exemptions (currently, $10.86 million), equalization continues to provide a tax advantage. One effective way to equalize your ownership of real estate is to convert it into TIC property and then transfer a TIC interest from one spouse to the other.
Get an Appraisal
If you’re considering using TIC interests as part of your estate plan, it’s critical to obtain an appraisal to support the valuation of these interests.
Keep in mind that appraising a TIC interest is a two-step process
- An appraisal of the real estate as a whole, and
- An appraisal of the fractional interest.
In some cases, it may be desirable to use two appraisers – a real estate appraiser for the underlying property and a business valuation expert to quantify and support any valuation discounts you claim.
If you have questions about tenancy-in-common and how it could impact your estate planning, contact us.