Many investors have more than one investment account. They have a 401k at work, an IRA, a Roth IRA, and one or more non-retirement investment accounts. How you name each one is very important. That’s called Asset Titling.
Correctly titling your asset accounts can help ensure that your property and investments are passed down the way you intend. Mistakes in titling can lead to issues for you and/or your heirs.
What is asset titling?
Asset titling is the way you own an asset—such as in your individual name, jointly with someone else, in a trust or entity, etc. The way in which assets are titled can determine who controls the assets, tax consequences, whether the assets are subject to creditors’ claims, and who will receive the assets once you pass away, which is a critical part of estate planning.
Understand your titling options to ensure they are consistent with your goals.
- Individual name
Taking ownership of anything in your own name—whether it’s a bank or brokerage account, a home, a business, or anything—is very easy. You have complete control. The downside of that, however, is that assets that you own individually are fully subject to the claims of any of your creditors. In addition, assets in your name will be part of your taxable estate once you pass away. Assuming no beneficiary is listed specifically in the asset documentation, assets you own in your individual name will pass to your beneficiaries under the terms of your Will and will have to go through a process known as probate.
- Pay on Death / Transfer on Death
While the name isn’t pretty, I set up many of these for my clients. Examples are a bank account or a brokerage account.
These accounts work exactly like an individual account during your lifetime; you have complete control and assets are subject to your creditors’ claims. However, you can name a beneficiary who will inherit the account when you pass away without the account having to pass through probate under the terms of your Will.
When you pass, away the named beneficiary only needs to provide a death certificate and proof of identity; the beneficiary designation (not your Will) controls the disposition of the account. This is why the account does not need to go through probate before the beneficiary can take ownership of the account.
In some cases, parents prefer to have separate TOD or POD accounts for each child, which can lead to inequality among the beneficiaries if the accounts—which may have begun with roughly equal values—end up with very different values when the parent dies. I believe it is a better practice to split each account in whatever proportions you desire among your intended beneficiaries. If you do list multiple beneficiaries on an account, some states presume that all named beneficiaries participate equally. If you want to treat your named beneficiaries unequally, you may need multiple accounts or you may need to specify percentages. And make sure you’ve named a contingent beneficiary if you are able to do so in case your primary beneficiary dies before you.
- Joint ownership
Used when two or more people own an asset, for example, people who are married and own a house together, there are several ways to title joint ownership of assets.
- Joint tenants-in-common
Allows you to manage the asset jointly with the other joint tenants, whether a checking account, brokerage account, or some other asset—but each of the joint tenants is treated as owning a portion of the asset, which by default in most instances is one-half.
When one joint owner passes away, his or her portion of the asset doesn’t automatically pass to the surviving joint tenant. It passes through his or her estate, controlled by the Will, in the same way as any other individual asset. In addition, a tenant-in-common interest is fully subject to the claims of a joint owner’s creditors.
- Joint tenants with rights of survivorship
In a “rights of survivorship” title, each joint tenant has complete control of the entire account during his or her lifetime. When a joint tenant of a survivorship account dies, the surviving tenant automatically becomes the owner of the entire account without the need for probate. Like assets held as tenants-in-common, assets held with rights of survivorship are subject to the claims of the joint tenants’ creditors.
- Joint tenants by the entirety
In some states, this titling option is available to accounts or assets owned by two spouses. Joint tenants by the entirety works like a tenancy with rights of survivorship, and in addition provides a basic form of asset protection against a spouse’s creditors. The creditors of one spouse cannot seize entirety property, nor can they force a partition and sale of property held in this way. Note that this creditor protection is not perfect—when the non-debtor spouse dies, the debtor spouse automatically becomes the sole owner of the entire account, which would then be subject to creditors’ claims.
Note: Tenancy by the entirety is not an option in all states, so check with your lawyer.
- Trust or entity
If your planning includes an entity such as an LLC or S Corporation, or a trust, work with me to ensure that your assets are titled the way they should be. Ideally, assets you want to own in a trust or entity should be titled in that trust or entity from the beginning.
Key takeaway: Make sure account titles are consistent with your financial plan.
When you are opening a new account, be sure to review and confirm that the plan you have in place still meets your objectives. Questions about account titling frequently raise other questions about your broader plan.
Examples of common questions
- Let’s say you have a revocable trust, should a new account be opened in the name of the trust or in your individual name?
- If you have a joint account with a child or a parent, would a trust, or maybe a transfer-on-death or pay-on-death account, be a better option?
In addition, if you and your spouse own all of your property as joint tenants with rights of survivorship or by the entirety, it may be more difficult to take advantage of certain estate planning techniques, such as a bypass trust under a Will or revocable trust. Some of these techniques require each of you and your spouse to have assets in your individual name that will pass through your estate via your Will or revocable trust.
Make sure your asset titling reflects your overall plan—and that your overall plan reflects your wishes. You should consult with your tax and legal advisors before making any decisions about titling so you understand the impact. I can work with you to help put a plan in place.
Book a free consultation today to learn more.
IMPORTANT DISCLOSURES
©2022 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this newsletter are those of Kmotion. The articles and opinions are for general information only and are not intended to provide specific advice or recommendations for any individual. Nothing in this publication shall be construed as providing investment counseling or directing employees to participate in any investment program in any way. Please consult your financial advisor or other appropriate professional for further assistance with regard to your individual situation.
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