The Importance of Asset Titling in Estate Planning

People discussing in the office campusAsset titling is one of the most important — and often overlooked aspects of an estate plan. The manner in which an asset is titled determines how it can be disposed of during your lifetime and who receives it upon your death.

Why is asset titling so important?

The title of an asset will determine your property rights during your lifetime. It will also determine how that asset is transferred at death: according to your Will, by beneficiary designation, or based on an agreement or state law. The title of an asset is as important in determining who will inherit that asset as the terms of your Will or other estate planning documents. If asset titling has not been coordinated with your estate plan, the terms of your estate plan may never be realized.

You should work with your financial advisor and attorney to coordinate asset ownership with your estate plan, ensure assets will pass to beneficiaries according to your wishes, and that any tax planning becomes effective at your death.

COMMON TYPES OF ASSET TITLING
ASSET TITLEDESCRIPTIONHIGHLIGHTS
Sole OwnershipYou have complete title to the property.
  • If titled in your name alone with no beneficiary, asset passes through your probate estate upon your death.
  • Terms of your Will determine how asset will be distributed.
  • If you do not have a Will, state intestacy law determines how assets are distributed. Intestacy laws vary from state to state and typically distribute assets to a spouse, children, parents, grandchildren, siblings, or other relatives varying orders of preference.
Joint Tenancy With Right of SurvivorshipAssets are equally owned by two or more people, each having rights of survivorship.
  • Upon the death of one joint tenant, property becomes the solely owned property of the surviving joint tenant(s).
  • Assets automatically pass to survivor(s) allowing immediate access to asset without cost and delays of probate.
  • Deceased tenant’s interest in any joint property receives a step-up in cost basis, which means that the surviving owner’s basis will increase.
  • Joint owners do not have to be related to each other.
  • Asset will not pass according to your Will, but automatically to co-owner(s).
Tenancy by the EntiretyA form of joint ownership only available between spouses.
  • Not all states recognize this form of ownership
  • Neither spouse can dispose of the property without the other spouse’s permission.
  • Provides creditor protection except with respect to a federal tax lien on a property, which attaches even if only one spouse is liable for taxes due.
Tenancy in CommonTwo or more owners; may have equal or unequal fractional ownership.
  • Similar to sole ownership — when one owner dies, fractional interest owned by the decedent passes either by Will, or state intestacy law.
  • Does not have a survivorship feature.
  • Each owner may dispose of their share during their lifetime, or by Will following death.
Community PropertyCommunity property states include Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In addition, Puerto Rico recognizes community property.

Income earned and assets acquired after marriage are considered community assets, and each spouse owns 50%.

  • Each spouse holds an interest in all community assets, regardless of which spouse actually acquired the asset.
  • Each spouse may transfer his or her share of community assets by Will.
  • At the first spouse’s death, the entire community property asset will receive a full step-up in cost basis to the date of death fair market value.
  • There is no automatic right of survivorship, however community property may be owned jointly with right of survivorship, in which case deceased spouse’s interest will pass automatically to the surviving spouse.
Revocable TrustAssets owned by a trust pass per the terms of the trust, and are not subject to probate.
  • In order to be effective, asset ownership should be transferred to the trustee of the trust.
  • Assets that are owned by the trustee of the trust, or that pass to the trustee at death (either by beneficiary designation, P.O.D., T.O.D., or otherwise) will pass per the terms of the trust.

Types of account beneficiary designations

Beneficiary designation
Certain property will pass upon your death by way of a beneficiary designation. These forms are often provided as part of a contract issued by the plan provider for life insurance, annuities and retirement plan assets (e.g., IRA, 401(k), 403(b), 457(b), pension and profit sharing plans).

If you fail to execute a beneficiary designation form, typically the plan will have a default beneficiary, which is usually your probate estate. There may be income tax considerations when naming beneficiaries of retirement plan assets.

Transfer-on-death/payable-on-death (TOD/POD)
Some states permit bank or other investment accounts to be held with a “transfer-on-death” (TOD) or “pay-on-death” (POD) designation. When an account has a TOD or POD designation, it will automatically pass to the named beneficiary at the property owner’s death.

For example, a checking account might be titled “Jane Smith POD John Doe.” At Jane’s death, the checking account will automatically pass to John automatically without going through probate.

Beneficiary deeds
Some states recognize beneficiary deeds (also called transfer-on-death deeds). A beneficiary deed is filed with a deed to real estate, and identifies the person(s) who are to receive real estate following the property owner’s death. The designation is typically fully revocable during the owner’s lifetime. If the beneficiary deed is still in place at the owner’s death, the property passes to the designated beneficiary without going through probate. The property is still included in your gross estate for estate tax purposes.

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