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Estate Planning, Probate, and Elder Law

Why Correct Property Ownership is Important

A correct understanding of how your property is classified is an important part of an effective estate plan. The term property includes not only real estate but all assets (movable and immovable). Assuming property will be classified as separate when, in actuality, it is community property, or assuming property will automatically transfer by joint tenancy can cause havoc in an estate plan. The following information is from John’s book, Louisiana Retirement and Estate Planning. To order a copy of his book, click here.

An example of how misconceptions of property ownership may cause problems is illustrated in the following hypothetical: Boudreaux and Clotile were married and had two children. Boudreaux inherited a large amount of rental properties from his parents that remained his separate property. Each month the rental income proceeds were deposited into a separate savings account that he left to his daughter in his will along with the rental properties he inherited. Clotile had several large CDs in her name which were acquired during their marriage. Their son was also named on the account, but none of the funds in the CDs were put into the account by their son. Upon Boudreaux’s death, the rental properties will belong to their daughter according to Boudreaux’s will, but only one-half of the rental income savings account will belong to their daughter. The rental properties are Boudreaux’s separate property, and he may leave all of it to his daughter. The rental payments from this separate property, is community property. One half of the rental payment account belongs to Clotile. Boudreaux should have filed a Declaration of Separateness to classify the rental payments as separate property. Only then could all of the rental payments savings account be left to his daughter. Clotile died without a will two years after Boudreaux’s death. Upon Clotile’s death, the CDs with her and her son’s name on the registration will not automatically transfer to him. Her son did not contribute any of the funds to the account. Merely placing his name on the account does not transfer ownership. The CDs will be transferred according to the intestacy laws of Louisiana and will be split between their son and daughter.

The previous example describes two very common property ownership misconceptions in Louisiana namely: income from separate property is community property and adding a name to a CD or other account does not change or transfer ownership. These problems can be easily avoided with proper planning, and with a correct understanding of property ownership law in Louisiana.

Community Property

In Louisiana, property in possession of a spouse during a community regime is presumed to be community property. Each spouse owns an undivided one-half interest in the community property. The community regime is in effect during marriage unless altered by marriage contract (pre-nuptial agreement). Spouses who move to Louisiana may opt out of the default community property rules without the court’s approval if elected within one year of moving to Louisiana. After one year elapses, spouses who elect to opt out of the community property regime must petition the court for approval.

Community Property includes the following:

  1. Property acquired during the existence of the community regime through the effort, skill or industry of either spouse. Thus wages, earnings or other compensation earned during marriage is community property.
  2. Property acquired with community assets.
  3. Property acquired with both community and separate property, unless the community property is inconsequential in comparison. Because there is a presumption that all property acquired during the community regime is community property, the person claiming the property is separate property bears the burden of proving the property is separate. Determining if the community property used to purchase the asset was “inconsequential” in comparison to the separate property depends on the facts of a given situation. If the property is community, the spouse whose separate funds were used to acquire the community assets would be entitled to reimbursement for the value of the separate property upon the termination of the community. Property donated to both spouses jointly is community property.
  4. Natural and civil fruits of community property. For example, dividends, interest, mineral royalties, rents and other “fruits” derived from community property are community property.
  5. Fruits and revenues of separate property. Rental income, dividends, interest income, and royalty payments from separate rental property are community property absent a recorded declaration of separateness.
  6. Damages awarded for loss or injury to community property.
  7. All other property not classified as separate property.

Separate property brought into Louisiana by a married couple remains separate property when the couple moves to Louisiana; however, the property is presumed to be community property. The spouse claiming that the property is separate property bears the burden of proving the property is separate property. Immovable property located in Louisiana is governed by Louisiana community property law regardless of the acquiring party’s domicile.

The fruits and products of separate property are community property; however, the owner of the separate property may execute a declaration of separateness reserving such fruits and products as separate property. For immovable property, the declaration must be filed in the parish of the immovable property’s locale. For movable property, the declaration must be filed in the parish of residence. Without reserving fruits and products (rents, interest, dividends, etc.) of separate property as separate, heirs with a claim to a portion of the community property have a claim to a portion of these fruits and products.

Further confusion arises when spouses donate property to each other. When a spouse donates community property to the other spouse (making the property the separate property of the donee spouse), the fruits and products are the separate property of the donee (receiving) spouse. When a spouse donates separate property to the other spouse (making it community property), the fruits and products will be community property. A declaration of separateness is required to reserve the fruits and products as separate property.

Community Property Basis Step-Up

Community property receives a step-up in basis for the surviving spouse upon the death of the first spouse. For example, Boudreaux and Clotile own a tract of land worth $100,000 with a cost basis of $10,000. If, upon Boudreaux’s death the land is presumed to be community property, half of the value of property is included in Boudreaux’s estate; however, the entire tract of land receives a step up in basis to the value of the land on the date of Boudreaux’s death. The land may now be sold by Clotile without paying capital gain taxes on the land due to the step up in basis to fair market value. If the property were the separate property of Clotile, there would be no step up in basis upon Boudreaux’s death and the sale would cause a capital gain of $90,000.

Separate Property

Separate property includes all property that is not community property. A party wishing to rebut the presumption that property acquired during the existence of a community regime is community property must do so with proof that is “strict, clear, positive and legally certain.”

Separate property includes the following:

  1. Property acquired by a spouse prior to the start of a community regime. All property owned prior to a community regime is separate property, unless the spouse converts the property to community property.
  2. Property acquired by a spouse with separate property.
  3. Property acquired with separate and community property when the value of the community property is “inconsequential” in comparison to the separate property. The non-owner spouse is entitled to reimbursement for one-half of the value of the community property used to acquire the separate property.
  4. Property acquired by a spouse by donation or inheritance to her individually.
  5. Property acquired by a spouse as a result of a voluntary partition of the community during the community’s existence.

Separate property may be converted to community property by donation between the spouses. Likewise, community property may be converted to separate property by donation of a spouse’s community half to the other spouse. No gift taxes result due to the unlimited marital deduction. This strategy may be used to help equalize the value of each spouse’s estate to ensure that the lifetime federal estate tax exemption is not wasted if the first spouse to die has too few assets to utilize their entire exemption.

Many people have the belief that if community property and separate property are commingled or mixed into one account, all of the separate property is converted to community property. The mere commingling of separate property and community property does not automatically convert separate property into community property. For example, commingling separate funds with a checking account containing community funds does not automatically convert the separate funds into community property. However, the spouse claiming that the property is separate must rebut the presumption that the funds are community property with “strict, clear, positive and legally certain” evidence. Clear documentation tracking the source of funds as separate property would provide such evidence.

For example, if Thibodaux deposits inherited investments into a community property account owned by him and his wife, Marie, the presumption is that the entire account is community property. If Thibodaux can document with sufficient proof which assets are his separate property, he (or his separate property heirs) can prove these assets are Thibodaux’s separate property. Account statements clearly showing the deposits of the investment funds into the account should provide sufficient proof. To avoid having to prove the assets are separate property, Thibodaux should place the assets into a separate account registered solely in his name.

Although dividends and interest of separate property are community property, capital appreciation of separate property is generally not community property. Thus the increase in value of a separate property stock investment is separate property, but dividends from this investment are community property unless a declaration of separateness is filed.

It is important to know how your property is classified. A bequest in a will leaving half of the testator’s separate property to a child or all of the community property to the surviving spouse may cause unnecessary problems if there is a dispute over whether certain property of the testator is classified as community or separate. Proper planning and documentation of the status of assets is essential to ensure a smooth transfer of assets from your estate.

Tenancy in Common (Co-ownership)

A third type of property ownership is recognized in Louisiana, namely, tenancy in common. Louisiana law allows two or more individuals to own property “in indivision”, with each having undivided fractional shares. Co-ownership occurs when two or more people own the same thing. Unless proven otherwise, there is a presumption that the co-owners have equal shares of the co-owned property; however, co-ownership may be split amongst the owners in numerous fractional share combinations: 60/40, 75/25, 99/1, 20/30/50, etc.

Each co-owner may transfer, lease or burden with usufruct her share of the property held as tenants in common. The consent of all co-owners is required to transfer, encumber or lease the entire co-owned property.

The consideration furnished test looks to the property that each “owner” contributed. For example, if a parent and child each contribute $5,000 to open a bank or investment account, each will have a 50% ownership interest in the account. If the parent dies, 50% of the account value at the date of death (assuming no withdrawals or additional contributions) will be included in the parent’s probate estate and gross estate. If the parent contributes $7,000 and the child contributes $3,000 to open the account, the parent will have a 70% ownership interest and the child a 30% ownership interest. If the parent dies, 70% of the account value at the date of death will be included in the parent’s probate estate and gross estate. The most common example is where the parent contributes 100% of the account value and the child contributes nothing. In this case, 100% of the account value at the date of death is included in the parent’s probate estate and gross estate. None of the account would transfer to the child unless the child inherits by will or through intestacy.

If two or more people inherit the same tract of real estate and neither is given a specific section of land, it is owned in indivision as co-owners. A co-owner may decide to end their co-ownership in several ways. They may agree to sell the entire tract and split the proceeds or to be bought out by other co-owners. In addition, one co-owner may decide to sell his or her undivided interest to a third party. Another option is a partition “in kind” whereby the property is divided into separate tracts of land where each co-owner will be the sole owner of their respective tract of land. If all of the co-owners agree as to how to partition the property, it may be divided without judicial intervention. If they are unable to agree, a co-owner may petition the court to determine how to partition the property. If the property cannot be split into parcels of equal value, the property may be sold by sheriff sale (partition by licitation).

Property that is inherited by two or more people is owned in co-ownership. There can be problems if the heirs cannot agree on how the property is to be used or if they cannot agree on how to split the property. This type of situation can easily lead to judicial intervention through a sheriff’s sale or partition-in-kind with the court determining how to split the property.

Upon the death of one or more co-owners, the undivided share of the deceased co-owner will be transferred to the decedent’s heirs by will or intestacy. The surviving co-owners do not automatically become the owners of the deceased co-owner’s share, unless they inherit by will or through intestacy.

Property Owned as Joint Tenants With Rights of Survivorship

Louisiana does not recognize Joint Tenancy With Rights of Survivorship (JTWOS); therefore, property titled JTWOS will remain community property or owned as tenants in common. A common pitfall is illustrated in the following example involving out of state immovable property, typically real estate. Immovable property is governed by the laws of the state in which it is located. Care must be taken when titling property located out of Louisiana to ensure the property title does not frustrate your estate plan. For example: a brother and sister own immovable property in Mississippi as JTWOS. The brother’s will bequeaths to his children his one-half interest in this property after his death. The brother predeceases the sister. The sister is now the full owner of this immovable property and the brother’s children receive none of the property he owned as JTWOS in Mississippi. Because the immovable was located in Mississippi which recognizes JTWOS, the surviving joint tenant, the sister, is the full owner of the property after the brother’s death regardless of the provisions in the brother’s will.

Contact lawyer John E. Sirois in Metairie at 985-580-2520 if you have questions about community property or planning your estate. Click on the Estate Planning Checklist to begin planning your estate. You may also e-mail him for a consultation.