Estate Planning: What You Should Know About Asset Titling

I recently met with a couple who had just received a sizable inher­i­tance from the wife’s father. An event like this usually raises questions about the impact on their financial plan, tax impli­ca­tions, and how the inher­i­tance should be invested. Her first question was, “How should the money/investments be titled?”

How you take title of assets can impact your estate, taxes, and perhaps the dispo­sition of the asset if a couple divorces. Many couples want assets to be titled simply in the event something happens to one so the other can take possession immedi­ately without taxes or compli­ca­tions. Joint ownership may be the simplest way to meet most of these objec­tives. However, joint ownership can get messy in the event of any number of occur­rences, such as divorce, second marriage, children from multiple marriages, adoption and blended families of all types. It’s important to under­stand the different types of ownership so you know when a change may be needed.

Joint Ownership

There are three ways to hold assets jointly:

• Joint with Rights of Survivorship. The right of survivorship dictates what happens to the co-owned property after one of its owners dies. This title states two or more parties have simul­ta­neous ownership. At the death of one of the joint tenants, ownership of the remaining property passes to the surviving owner and takes prece­dence over other claims upon the property. The will cannot redirect ownership of property held in this form.
• Joint Tenants in Common. Tenants in common means there is a divided interest, although none of the owners may claim to own a specific part of the property. At the death of one of the joint owners, the share owned by the deceased must pass through their will to determine ownership. The surviving joint owner doesn’t automat­i­cally own the entirety of assets.
• Joint Tenancy by the Entirety. This type of joint ownership is similar to rights of survivorship for married couples. It allows spouses to own property together as a single legal entity. Under a tenancy by the entirety, ownership cannot be separated, which means creditors of an individual spouse may not attach and sell the property. Only creditors of the couple may make claims against the property.

Sole Ownership

The dispo­sition of single name assets is controlled by a will. It could also be controlled through a transfer on death (TOD) desig­nation or payable on death (POD). Adding a TOD desig­nation allows you to pass the securities you own directly to another person or entity without having to go through probate. POD desig­na­tions do the same thing for bank accounts. Estab­lishing accounts with a TOD or POD desig­nation bypasses the executor or admin­is­trator of your estate. The benefi­ciaries must take steps to re-register the account into their names.

Contractual

This type of account passes to named benefi­ciaries (in the contract). Commonly held contractual accounts are annuities, life insurance policies, employer-sponsored retirement accounts (401(k)s, 403(b)s, and 457 plans), and individual retirement accounts like IRAs and Roth IRAs. The will only controls dispo­sition of contractual accounts if no benefi­ciary is specified or if the estate is named as beneficiary.

In Trust

There are many types of trusts that can be estab­lished to take ownership of assets. The type of trust you choose will vary depending on what you want to accom­plish and can have a signif­icant impact on income and estate taxes. Providing details on the many different types of trusts is well beyond the scope of this newsletter. For simplicity, we refer to a revocable living trust, which would allow one or more persons to be trustees. In this respect, the trust functions similarly to joint ownership with rights of survivorship. The final dispo­sition of the asset will be deter­mined by the terms of the trust.

Community Property

This type of title may only be used by married couples in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.). Each person owns an undivided interest in the entire property. When one spouse dies the survivor automat­i­cally receives the entire interest avoiding the need for probate. Property titled as community property will not be controlled by a person’s will or trust. There is a benefit from a capital gains tax stand­point in that the entire property (not just the half belonging to the deceased spouse) will receive a step up in basis on death.

Summary

The form of ownership in which you take title to property can signif­i­cantly affect the way the property is taxed, passed to others at death, or divided in the event of divorce. There are benefits and conse­quences to taking title to property. Your circum­stances will merit the value (or cost) that you place on each of these forms of ownership. It is important to take time to consider exactly how you intend to use, and ultimately transfer, the asset before titling it.

Rick’s Tips:

• How assets are titled impacts estate plans, taxes, and dispo­sition in divorce.
• Joint with Rights of Survivorship is one of the most common ways a married couple holds title to assets.
• You can create a trust to accom­plish many different objec­tives but there are typically pros and cons that must be weighed.