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What Is It?
A tenancy by the entirety is a way spouses can own property together. As a Hawaiian Electric Industries employee, if you are the co-owner of property owned as a tenancy by the entirety (you are a tenant by the entirety), that property passes automatically at your death to your surviving spouse without the expense and delay of probate.
Example(s): Jack and Sylvia own a cabin on a hill as tenants by the entirety. When Jack dies, Sylvia automatically owns the cabin.
You can own most types of property with your spouse as tenants by the entirety. Real estate is the most common type of property to own as tenants by the entirety, but you can own other property (such as bank accounts, securities, and vehicles) in this way. A tenancy by the entirety is almost identical to a joint tenancy, but is available only to married couples.
When Can It Be Used?
You Are Married and Want to Make Your Spouse Co-Owner
Only a married couple can own property as tenants by the entirety.
Your State Permits Tenancy by the Entirety
Not all states permit a tenancy by the entirety.
The Property You Want to Transfer Can Be Owned As Tenants by the Entirety
Some states restrict the types of property that can be held as a tenancy by the entirety. Other types of property, such as an IRA, can't be owned as a tenancy by the entirety.
Strengths
Avoids the Expense and Delay of Probate
Probate can be expensive, and generally the largest expense is the attorney's fees, especially if they are calculated as a percentage of the gross probate estate. For employees in Hawaiian Electric Industries companies who are strongly invested in real estate, owning your property as a tenancy by the entirety could be beneficial as it enables the possibility of avoiding probate and payment of costly attorney's fees.
Caution: In reality, it is practically impossible to avoid probate. Generally, some level of probate proceeding will be necessary to settle your estate.
Tip: Negotiating an hourly rate or flat fee may result in more reasonable attorney's fees.
The person responsible for managing your estate during the probate process (your personal representative) is entitled to a fee for these services, although a friend or relative serving as a personal representative may agree to serve without a fee.
Prevents Additional Probate Proceedings for Property Owned In Other States
Property that you own in another state must go through a separate ancillary probate in that state unless it can be excluded from probate, for example, by owning it as a tenancy by the entirety.
Example(s): If you own a home in Massachusetts, a cabin in New Hampshire, and a time-share condominium in Colorado, your estate will be probated in all three states. Although each state will probate only the property located in that state, each probate proceeding significantly increases the expense and delay of the entire process.
Minimizes Delays in the Transfer of Property
Probate takes an average of 12 months and may last for several years. All of the probate property generally won't be distributed until the process is completed. However, owning property as a tenancy by the entirety allows for an automatic transfer of that property at your death.
Probate can also interfere with the management of property such as a closely held business or stock portfolio. Although your personal representative is responsible for managing the property until probate is complete, he or she may not have the expertise or authority to make significant management and/or financial decisions. Owning the property as a tenancy by the entirety will result in an automatic transfer of the property and possibly a smoother management transition.
Discourages Interference with Your Plans to Distribute Your Property
Although it seems that anybody can bring a lawsuit, a will is generally much easier to challenge than a transfer of property by tenancy by the entirety.
Is Relatively Simple and Inexpensive to Create
In most instances, taking title to property as tenants by the entirety is not complicated. Many couples purchasing a home will take title as tenants by the entirety without any planning. Generally, you will not need to involve an attorney in creating a tenancy by the entirety. When purchasing a home, however, there are often other good reasons for involving an attorney.
Caution: Since your state may require you to use specific, unambiguous language when creating a tenancy by the entirety, it might be wise to consult an attorney to confirm that you have actually created a tenancy by the entirety.
Has Intangible and Emotional Benefits
Couples will often decide to own property as tenants by the entirety because it conforms to their feelings of partnership, faith, and unity. Planning to transfer the family home automatically to the surviving spouse may create a sense of well-being.
Caution: Your family may not actually be able to keep the home if you have not provided for future payments on it.
May Shield Property from the Creditors of the Tenants by the Entirety
In some states, one spouse's creditors cannot attach property held as a tenancy by the entirety. However, assets held as a tenancy by the entirety are protected only as long as both spouses are living and the marriage is not dissolved. This could have drastic consequences if, say, one spouse is sued and the other spouse dies shortly thereafter.
All property owned as tenants by the entirety is immediately exposed to the surviving spouse's current and potential creditors. Further, assets held as a tenancy by the entirety are not protected against joint debts. While titling property as a tenancy by the entirety may be an inexpensive and easy way to protect marital assets, it may not provide secure asset protection over the long term.
May Result In Lower Capital Gains Tax
Your surviving spouse may be subject to less capital gains tax when he or she sells the property than if you had given him or her the property during your life. In general, you are subject to capital gains taxes on the difference between what you 'paid' for property and what you receive when you sell it. For Hawaiian Electric Industries employees who have high exposure in the real estate market, this benefit is of particular interest as it diminishes taxes paid in transfer or sale of property. Furthermore, after your death, your surviving spouse will be treated as having 'paid' whatever your interest in the property was worth at your death.
Example(s): Years ago, Dylan and Barbara (husband and wife) bought rental property for $10,000, and owned it as tenants by the entirety. Dylan died when it was worth $100,000. Fifty percent of the property's value was included in Dylan's gross taxable estate. Barbara's tax basis in the property after Dylan's death is $55,000 — one-half of the original purchase price ($5,000) and the amount Dylan's one-half interest was worth at his death ($50,000). If Barbara sells the property for $100,000, she will have a capital gain of $45,000. If Barbara had owned the property outright, her capital gain would be $90,000. However, if Dylan had owned the property outright and left it to Barbara at his death, her basis would be $100,000 and she would have no capital gain. Note that the first $250,000 of capital gain on the sale of a principal residence is generally excluded from capital gains tax. (The excludable amount for a married couple is $500,000.)
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|
Dylan and Barbara Own as Tenants by the Entirety |
Dylan Owns Outright |
||
|
Dylan dies first |
Barbara dies first |
Dylan dies first |
Barbara dies first |
Sale Price |
$100,000 |
$100,000 |
$100,000 |
$100,000 |
Tax Basis |
-$55,000 |
-$55,000 |
-$100,000 |
-$10,000 |
Capital Gain |
$45,000 |
$45,000 |
$0 |
$90,000 |
Technical Note: This increase in what your co-tenant by the entirety is considered to have 'paid' for the property is called a step-up in basis.
Tradeoffs
It Is an Irrevocable Gift of Interest in the Property
Once you make your spouse a tenant by the entirety, he or she is a co-owner of that property for the rest of his or her life unless there is a divorce, an annulment, or an agreement to partition. If you die owning property in a tenancy by the entirety, your spouse will own the property outright and can do what he or she wants with it.
It May Not Be Appropriate If You Have a Large Estate
If you are married and own more than the federal estate tax applicable exclusion amount ($11,580,000 in 2020, $23,160,000 per married couple) in property as a couple, there may be a significant tax advantage in leaving some property to someone other than your spouse. If you make your spouse your joint tenant, you may be unable to take advantage of this strategy for that property. The availability of portability (the estate of a deceased spouse can transfer any unused exclusion to the surviving spouse) in 2011 and later years may make planning easier.
Caution: If your estate is this large and you are considering owning property in joint tenancy, you should meet with an attorney or tax professional regarding options to minimize potential federal and/or state estate taxes.
It May Not Protect Your Spouse from Your Creditors
The probate process requires that all claims against the estate be presented within months of your death, preventing delayed claims against your estate and beneficiaries.
Technical Note: The statute of limitations is a rule that prevents lawsuits that haven't been brought quickly enough. Someone can sue you (or your estate) until the statute of limitations for that claim has expired.
Example(s): If the statute of limitations for a breach of contract lawsuit is seven years, the Record Club has seven years to sue you for failing to buy that seventh cassette. However, if your property passes through probate, that property is immune from claims by your creditors, regardless of whether the claim is barred by the statute of limitations.
Your Interest In Property Held As a Tenancy By the Entirety Is Guaranteed to Go to Your Spouse If You Die First
You cannot leave your interest in property held as a tenancy by the entirety to anyone in your will. Your interest passes automatically to your surviving spouse.
You Cannot Control How the Property Will Be Used After Your Death
The surviving spouse has complete control over the property, which could result in an accidental disinheritance.
Example(s): Louis and Sally own a house as tenants by the entirety. Louis dies and Sally, as the surviving spouse, owns the house outright. Sally marries Sylvester and they own the house as tenants by the entirety. Sally dies, and Sylvester becomes the sole owner. Louis and Sally's daughter, Patty, receives nothing, which Louis never intended.
It Does Not Give Your Spouse the Legal Right to Manage or Dispose of the Property If You Become Incompetent
If you become incompetent, the fact that you own property in a tenancy by the entirety doesn't automatically allow your spouse to exercise control over the property, even on your behalf.
Example(s): If a couple owns a house as tenants by the entirety and the husband becomes incompetent, his wife does not have the right to sell or mortgage the property to pay for his care. She will need to have a guardian appointed, unless she has his durable power of attorney, a document giving her the legal right to act on his behalf.
It May Create Problems for Business Owners Seeking To Take Advantage of Certain Estate Planning Strategies
A business owner can take advantage of certain estate planning strategies (such as Section 303 death tax redemptions, Section 2032A special use valuations, and Section 6166 deferral of estate taxes) if his or her interest in the business represents a large enough percentage of his or her total estate. However, if the business interest is owned as a tenancy by the entirety, only half of the business will be included in the estate for estate tax purposes and he or she may not pass the ownership test. Therefore, if you anticipate using one of these techniques, tenancy by the entirety might be disadvantageous.
How to Do It
Evaluate the Desirability of the Strategy
Because taking title to property as tenants by the entirety is simple and inexpensive, it is a very common way for Hawaiian Electric Industries employees to own property. You may be unduly biased in favor of forming a tenancy by the entirety. However, you might be better served by another planning strategy. You should compare the strengths and tradeoffs of a tenancy by the entirety with those of alternative strategies.
Confirm That Tenancy by the Entirety Doesn't Interfere With Other Estate Planning Strategies
Property held as a tenancy by the entirety may interfere with other strategies you may have implemented, such as a credit shelter trust or living trust. You should determine how your property will be distributed at your death under your present estate plan to ensure that unintended consequences do not arise.
Tax Considerations
Income Tax
Your Surviving Spouse May Receive a Stepped-Up Basis in Your Interest in the Property
Half of the property's fair market value may be includable in your estate for estate tax purposes, but your surviving spouse may receive a stepped-up basis in that interest.
Example(s): Years ago, Dick and Judith (husband and wife) bought their house for $10,000, and held it as tenants by the entirety. Dick died when the property was worth $100,000. Because they owned the house as tenants by the entirety, 50 percent of the value of the property was subject to Dick's estate taxes. Judith's basis in the property is now $55,000 — Dick's 50 percent interest that has been stepped-up and her $5,000 basis (one-half of the purchase price). If Judith sells the house for $100,000, she will have a capital gain of $45,000 ($100,000 minus the $55,000 basis). If Judith had owned the house outright, her capital gain would be $90,000. However, if Dick had owned the house outright and left it to Judith at his death, her basis would be $100,000 and she would have had no capital gain ($100,000 sale price minus $100,000 basis). (Note that for an individual the first $250,000 of capital gain from the sale of a principal residence is generally excluded from capital gains taxes. The exclusion currently is $500,000 for a married couple's gain from such a sale.)
Tip: If you were sure which spouse would die first, you could transfer the property to that spouse. If the deceased spouse then left the property to the surviving spouse, the surviving spouse may receive a 100 percent step-up in basis. This would not apply, though, if the spouse receiving the gift died within one year of the gift. The problem is that you can't be absolutely sure and, if you are wrong, the surviving spouse receives no step-up in basis.
Questions & Answers
Why Isn't Property Held As a Tenancy By the Entirety Subject to Probate?
If you own property as a tenancy by the entirety and you die, your interest in the property is automatically transferred to your surviving spouse. The probate court doesn't become involved with property that passes to others at your death because of the form of ownership ('title').
How does the recent benefit rate increase effective August 1, 2020, impact the overall retirement benefits for employees of the Hotel Union & Hotel Industry of Hawaii? Employees need to understand how the increase from $34.92 to $35.92 per year of credited service translates into their calculated pension benefits, particularly those nearing retirement. Discussion on how these changes affect both current employees and potential retirees is crucial for informed decision-making regarding retirement timing and financial planning.
The recent benefit rate increase from $34.92 to $35.92 per year of credited service increases the maximum monthly retirement benefit to $1,257.20 for employees with 35 years of service. This change, effective August 1, 2020, means that employees retiring after that date will benefit from higher monthly pension payments. Those nearing retirement should factor in this increase when calculating their pension benefits, as it can significantly improve their financial security in retirement(Hotel Union Hotel Indu…).
What should employees of the Hotel Union & Hotel Industry of Hawaii consider when applying for pension benefits under the new amendments to the plan? It is essential for employees to recognize what benefits may apply to them based on their work history and service years. A thorough understanding of how the amended plan provisions relate to their individual circumstances will enable them to make more beneficial choices regarding their retirement options.
Employees must consider how their years of service and the recent amendments, like the benefit rate increase, apply to their personal circumstances. Delaying retirement past August 1, 2020, may lead to higher pension payments. It’s crucial to consult the Trust Fund Office to understand how these changes affect individual benefit calculations and make informed retirement decisions based on their work history(Hotel Union Hotel Indu…).
In what ways do the new rules regarding the Required Minimum Distribution (RMD) affect employees of the Hotel Union & Hotel Industry of Hawaii? Employees must grasp the nuances of the new RMD timeline, particularly how it has shifted from age 70-1/2 to 72, impacting their pension benefit distribution strategies. This updated rule introduces significant planning considerations for those continuing to work past age 70-1/2, including necessary adjustments to retirement timelines and financial sustainability.
The new RMD rules, effective January 1, 2020, have increased the age for required pension distributions from 70½ to 72. This change allows employees to delay their pension payouts until they reach age 72 or terminate employment, whichever comes later. Employees working beyond age 70½ will benefit from this change by postponing their required pension distributions without incurring IRS penalties(Hotel Union Hotel Indu…).
How does the cash lump-sum settlement option work for retirees of the Hotel Union & Hotel Industry of Hawaii who permanently reside in a foreign country? Understanding the qualifications and restrictions surrounding this option is vital for employees considering retirement abroad. Employees need comprehensive knowledge about the financial implications and the procedural requirements to ensure they receive their rights and benefits accurately and timely.
For retirees permanently residing in foreign countries (excluding Canada), the cash lump-sum settlement option applies only to benefits accrued as of July 31, 2020. Any benefits earned after that date must be paid as a monthly annuity. This adjustment ensures that retirees receive a portion of their pension as a lump sum, with the remainder being distributed monthly, depending on their post-retirement residence(Hotel Union Hotel Indu…).
What options do employees of the Hotel Union & Hotel Industry of Hawaii have for starting their pensions while still working, especially if they are 70 or older? Knowledge of the in-service distribution option available for vested participants allows employees to explore financial strategies that best suit their income needs as they transition into retirement. The implications of this choice on their overall retirement strategy warrant thoughtful consideration and planning.
Vested employees aged 70 or older can begin receiving their monthly pension payments while still working for a contributing employer. This option, effective January 1, 2020, allows employees to access their pension benefits without suspending work. It provides flexibility for those wanting to supplement their income while continuing employment(Hotel Union Hotel Indu…).
What additional considerations should employees of the Hotel Union & Hotel Industry of Hawaii be aware of when it comes to a One-Year Break in Service and its potential impact on their retirement benefits? Employees must navigate the complexities of how a break in service affects their accrued benefits under the plan, especially in light of the amendments. Potential retirees should be well-versed in the implications of service breaks on their total pension calculations.
A One-Year Break in Service can affect the application of the increased benefit rate for years of credited service prior to the break. Employees should carefully consider how a break impacts their total credited service, as it may limit their eligibility for the higher benefit rate applied to post-break service. Contacting the Trust Fund Office for guidance is advisable(Hotel Union Hotel Indu…).
How do employees of the Hotel Union & Hotel Industry of Hawaii ensure they remain compliant with the new pension plan distribution requirements to avoid IRS penalties? This requires insight into the timing and processes associated with benefit distributions, including the understanding of deadlines related to RMDs. Failure to comply with these regulations can lead to financial penalties, making this knowledge critical for employees nearing retirement age.
Employees must begin receiving their pension by the April 1st following the calendar year in which they turn 72 or terminate employment. Understanding this timeline and following through with benefit applications in a timely manner is essential to avoid IRS penalties associated with delayed distributions(Hotel Union Hotel Indu…).
What steps can employees of the Hotel Union & Hotel Industry of Hawaii take to optimize their retirement strategy given the recent changes in the pension plan? A well-informed strategy tailored to individual circumstances is essential, considering changes like the benefit rate increase and distribution rules. Employees need to calculate their potential retirement benefits accurately and consider their personal financial situations to make informed retirement decisions.
Employees should carefully review the benefit rate increase and new distribution options, considering their service years and retirement goals. Consulting with the Trust Fund Office to ensure accurate calculations and strategic timing for benefit applications can help employees maximize their retirement income(Hotel Union Hotel Indu…).
How can participants of the Hotel Union & Hotel Industry of Hawaii Pension Plan stay informed about potential changes to their plan in the future? Ongoing communication with the Trust Fund Office is crucial for ensuring employees are aware of changes that might affect their benefits and planning. Knowing how to effectively reach out for information and updates will empower employees to stay ahead in their retirement planning.
Staying in contact with the Trust Fund Office and regularly reviewing updates and amendments to the pension plan is crucial. Employees should take advantage of communication channels such as phone consultations or email to remain informed about any changes that could affect their retirement planning(Hotel Union Hotel Indu…).
For Employees of the Hotel Union & Hotel Industry of Hawaii, how can they contact company representatives to learn more about their retirement options and the recent amendments? Understanding the best practices for reaching out to the Trust Fund Office for assistance reflects the company’s commitment to supporting employees during their retirement planning process. Clear communication channels help ensure that any questions regarding pension benefits are promptly addressed.
Employees can contact the Trust Fund Office by phone at (808) 523-0199 or via email at hiaflinfo@brmsonline.com during business hours. Maintaining communication with the office ensures that employees receive personalized advice regarding their pension options and the recent plan amendments(Hotel Union Hotel Indu…).