The Importance of Account Titling

Why it matters . . .

Account and asset titling has a substantial impact on who has control in the management of your assets. Improperly titled assets can potentially have significant consequences during the ultimate transfer, which happens upon death of the account owner. Even the most well-constructed estate plan can be compromised by improper titling, which can cause changes in the intended wealth transfer and could jeopardize tax minimization strategies.

Many investors do not realize that by holding assets in ordinary individual or joint accounts, that they may be exposing themselves, their heirs and their estates to unnecessary risk for probate and taxation. Therefore, how you title your accounts is extremely important to you and your loved ones.

Common Account Titling Choices

Type Description Benefits Considerations
Joint Tenants with Rights of Survivorship (JTWROS) Most common type of ownership; the surviving account owner receives proceeds irrespective of any provisions set out in Wills or revocable living trusts (RLT) Avoid probate Potential estate tax planning difficulties and creditor exposure
Transfer on Death (TOD) / Payable on Death (POD) Proceeds pass directly to the named designated beneficiary or beneficiaries; generally not subject to Wills or RLT Maintain property in individual name, but still have assets transfer free from probate to a surviving spouse or other named party upon death Potential estate tax planning difficulties and creditor exposure
Tenants in Common (TEN COM) Each “tenant” or owner has a distinct and undivided interest in the property in question (typically 50/50 for spouses). Upon the death of a TEN COM owner, the decedent’s proportionate interest in the property transfers to their respective estate and is distributed accordingly. Avoids some of the potential estate tax planning pitfalls associated with JTWROS ownership Potential estate tax planning difficulties
Community Property Each spouse generally has a 50% undivided interest in the Community Property, with their interest passing according to their estate plan upon their death. Possibility for a step-up in basis on both spouses’ halves of the property upon the first spouse’s death Not available in every state; Consult attorney in State of Residence to review impact of Community Property Laws
Revocable Living Trust (RLT) Provides a mechanism for the ownership and management of assets during lifetime (unlike a Will), while also serving as an instrument to distribute assets upon death (like a Will). Avoid probate Creditor exposure

 

Could these scenarios apply to you?

Listed below are several of the most frequent scenarios for the distribution of assets when planning for retirement and beyond:

  • A couple has established a Revocable Living Trust and wants the assets to go to the trust beneficiaries - Accounts could be titled in the name of the trustee(s), often the owner or owner and spouse/partner (under agreement, dated).
  • A husband and wife want to hold the account with each jointly entitled to 100% of the account, with all assets going to the survivor following one’s death - Accounts could be titled Joint Tenants with Right of Survivorship (JTWROS) .
  • A brother wants his sister shown as partial owner of the account, with the brother controlling his respective interest during their lives and upon death - Accounts could be titled Tenants in Common (TEN COM).
  • A father is the sole owner of the account, but wants to avoid probate while having the account pass automatically to his daughter upon his death - Accounts could be titled Transfer on Death (TOD)
  • A couple has tax-planning provisions through a Will - Be careful. In this circumstance, neither TOD nor JTWROS may be appropriate since the account would pass automatically, possibly escaping the will’s tax minimization strategies.
  • A mother wants to give her son access to her account, but she wants to maintain ownership of the account - A Power of Attorney may be a better choice than account titling such as JTWROS. Be careful in creating a JTWROS account: the joint account owner is entitled to 100% of the account assets; a gift is made, which may be unintentional and could negatively affect the account’s cost basis step-up at death.

What you can do

To begin, it is important that you make time for a discussion with your D.A. Davidson Financial Advisor about your objectives for retirement, gifting and inheritance. It is also important to consider insurance, contingencies for physical or mental impairment and other legacy-related issues.

You should share with your Financial Advisor how your estate plan is structured and how assets held outside of D.A. Davidson are titled, as a comprehensive view is the best path to success. In life and upon death, proper account titling can make a big difference by helping to smooth the transfer of assets while saving money and reducing anxiety.

Talk to your D.A. Davidson Financial Advisor - they have the knowledge to help you plan for a sound future.
Disclaimer: D.A. Davidson and its Financial Advisors do not provide tax or legal advice. Please consult with your tax or legal professional for guidance on your specific situation.