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.
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.
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.
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.
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.
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.
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.
- 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.