MoneyDo: Importance of Account Titling

A few weeks ago, we talked about beneficiary designation, which is a critical part of the estate planning puzzle. Another related issue that works alongside beneficiary designation is account titling, which addresses how you intentionally and specifically title your accounts, will and trust so that your family faces the least amount of confusion and tax consequences.

Account titling is an important part of getting your assets organized. Its simplicity often means it gets overlooked, which can expose you and your estate to risks and tax consequences.  This week we suggest you review the ownership structure of your accounts and make sure it works in conjunction (not contrary) with your estate planning goals.

An example might be that you have chosen Susan to be your beneficiary for your checking account. Titling would have you consider how and when Susan is to receive the account. You might choose TOD, POD, TIC, or a contingency.

We turned to our tax planner – a CFP herself – and our planning team and asked them to give us some insights on account titling.

Account titling refers to who is listed as an owner of an account or property, and the type of ownership.

Individual account: when one person owns the account and is listed as the owner. Assuming there is no beneficiary appointed, the account will then pass according to the estate plan or will.  Depending on the estate plan the assets may be subject to probate.

Joint with right of survivorship (JTWROS): a very common form of ownership that at the death of one owner the assets will transfer to the other account holder.  This form of titling will supersede a will and property will transfer according to the title on the asset.  Beware of adding a child to an account as a joint owner, as this would result in a gift to them and depending on the size of the account would require additional tax filings.

In nine states, including Wisconsin, there is a form of ownership known as community property with right of survivorship.  This is an option only available to spouses, and at the passing of the first spouses the assets will transfer to the living spouse.

Tenants in Common (TIC): ownership is based on the proportional amount that was contributed to the account by the owner.  This will be subject to a will and does not automatically pass to the other owners.  This form of ownership is a good way to ensure that assets pass according to your estate plan rather than by the titling of the account when there are multiple owner cases.

Payable on Death/Transfer on Death: a way to add a designated beneficiary to the title.  This designation specifies to whom the assets will be transferred to at death.  The assets pass according to the title and not by the will, they will also avoid probate.

A trust can also hold title to an asset, for instance a living or revocable trust.  This is generally part of an estate plan and the trust document will then control the administration of the assets during life and at death.  The benefits of a trust are all assets can be liquid and administered in one place at death.  The trust eliminate the need for probate, but depending on the type of trust there may be varying tax consequences that the owner should be aware of.

It is important to note which types of account titling pass according to title or by will.  Also be aware that if the asset pass according to a will that it may be subject to probate, which results in additional administration expense and makes the proceedings public.  If you have a will or a trust it also important that in order to make sure the documents are effective and operating as intended that your account tilling correlates what your estate plan intended.