Asset titling is often overlooked and can be one of the most important elements of an estate plan. If asset titling has not been correctly coordinated with your estate plan, your plan may not turn out as you intended.
Most of us would like to specify how the assets we accumulated over our lifetime are distributed after our death. Many of us (mistakenly) believe that we do this entirely through our will. That actually may or may not be true. Various types of assets can be directed to others outside of your will. There can be good reasons for this such as avoiding probate and minimizing taxes.
In addition to wills, account titles and beneficiary designations control who gets which assets upon your death. These mechanisms actually supersede the instructions in your will. For example, your will may say that if your spouse predeceases you, everything should be divided equally among your kids. However, if one of your children is included in a certain type of account tile or is a named beneficiary of a certain asset, they will receive 100% of that asset (contrary to the specifications in your will). It’s probably easiest to think about this as assets that are included in your will and assets that are excluded from your will. Excluded assets can be created through an account title or a beneficiary designation.
Account title and beneficiary designation do the same thing. They transfer assets outside of your will. Some assets may use account titles and different asset types need to use beneficiary designations. Account titling is used for assets such as bank/checking/CD/money-market accounts, many of your investment accounts and your home. Beneficiary designations control who receives things like life insurance, IRAs, 401(1)/403(b)/etc. and annuities.
Beneficiary designation is pretty straightforward. You simply fill out a form that specifies who the beneficiaries are. (You can also specify what percentage goes to each beneficiary.) Asset titling has more options. These include individual account, joint account (Joint Tenants with Right of Survivorship or Tenants in Common), Transfer on Death /Payable on Death, trust, accounts for minors (Uniform Gifts to Minors Act or Uniform Transfers to Minors Act). Let’s take a closer look at each of these.
Individual Account. Only your name appears on the title. When you die, the account goes into your estate. This is the most direct way to ensure that your will controls the distribution of your assets.
Joint Account. There are two types of joint accounts that are frequently used. These are Joint Tenants with Right of Survivorship (JTWROS) and Tenants in Common. JTWROS is a very common way for couples to share an asset. When the first person dies, the second one becomes the sole owner. This all happens outside of the estate. Tenants in Common is often used when the parties do want the portion owned by the decedent to flow into his or her estate and to be governed by their will.
Transfer on Death (TOD) and Payable on Death (POD). This is an individual account that passes to named beneficiaries upon your death. It happens outside the estate.
Trust. Trusts are legal entities that are set up by you and managed by a trustee. A common example is when you leave assets to minors. The trust will have language specifying who the beneficiaries are and how the assets will be managed and distributed. Assets can be placed into a trust immediately or upon your death. For example, a POD account title can be used to transfer that account into the trust outside of the estate process.
Minors Accounts. There are two types of Minors Accounts. One is the Uniform Gifts to Minors Act (UGMA) and the other is the Uniform Transfers to Minors Act (UTMA). Both are a way to transfer assets to minors without the cost of a formal trust. UGMA is for financial assets and UTMA can contain other assets such as works or art or real estate. All states recognize UGMAs. All but two states recognize UTMAs (Vermont and South Carolina). Along with the simplicity of Minors Accounts comes a lack of control compared with a formal trust. For example, Minors Accounts become the property of the trust beneficiary when they reach a certain age (21 years in Colorado). In a trust you can release funds on any scheduled you like – such as 25% at age 25 and the balance at age 30.
So, asset titling and beneficiary designation override what you declare in your will. It’s important to have everything synchronized so that the final result is what you want. If you have a number of assets, this can become a bit challenging. One way that some people handle this challenge is to keep things simple. They simply have joint accounts with their spouse (JTWROS) or designate their spouse as the beneficiary and specify the contingent beneficiary as their estate. Some version of this approach might fit your situation.
The concepts discussed in this article are pretty straightforward, but the details definitely matter and it can be easy to become confused. If you’d like to go over your situation, or any other financial matter, we can discuss this in a no-charge, no-obligation initial meeting. Please visit our website or give us a call at 970.419.8212 to set up an in-person or virtual meeting.
This article is for informational purposes only. This website does not provide tax or investment advice, nor is it an offer or solicitation of any kind to buy or sell any investment products. Please consult your tax or investment advisor for specific advice.