When you pass away, it is not just your will and revocable trust that direct the disposition of your assets. Asset title and designations may also pass assets directly to a named beneficiary or beneficiaries outside of your will and revocable trust. If asset title or designations are out of step with the dispositive plan set forth in your will and revocable trust, your estate plan could be turned on end and it could also drive up estate administration fees.
With tax season having wrapped up, and K-1s and 1099-INTs perhaps still sitting on your desk, you now have the perfect chance to get a snapshot of asset titling. A K-1 shows title of the asset in Part II, Line F. Form 1099-INT shows title of the asset under the box captioned “RECIPIENT’S name.” While these tax forms do not always match the formal title of the assets, they can be a good starting point in identifying which assets likely need further review. Other good starting points include the names listed on monthly account statements or annual property tax bills. Identifying assets that may have title or designation issues is the first step in getting your plan in order.
Below is a brief overview of asset title and designation formats, along with some estate planning tips.
Individually Titled Assets
An asset that is titled in your individual name will usually pass through your will to your revocable trust and, ultimately, to the beneficiary or beneficiaries named under your revocable trust as long as you do not have a transfer-on-death (TOD), pay-on-death (POD) or other beneficiary designation in place for that particular asset. However, an asset that passes through your will is subject to probate, which is usually not an efficient result because of the fees and delays associated with probate administration.
To avoid probate, consider retitling individually-titled assets in the name of your revocable trust or in one of the alternative methods described below.
Tenants-by-the-Entirety or Joint Tenants with Right of Survivorship
Generally speaking, assets titled as “tenants-by-the-entirety” (T-by-E) are held by a married couple as a single unit (i.e., with equal rights to the asset) and assets titled as “joint tenants with right of survivorship” (JTWROS) are held by two or more unmarried persons with equal rights to the asset. An asset titled T-by-E or JTWROS will pass automatically to the surviving owner when the first owner dies. Typically, all that is needed to retitle the asset in the sole name of the surviving owner is a copy of the death certificate of the predeceasing owner.
T-by-E and JTWROS assets do not pass through your will and revocable trust and, therefore, supersede the planning in those documents. Thus, it is important to consider whether having an asset pass immediately at death outside of your estate planning documents aligns with your current objectives. For example, consider that if a married couple’s estate planning documents provide for a marital trust on the death of the first spouse but all assets are titled T-by-E or JTWROS, then the surviving spouse would receive all assets outright, defeating the purpose of the marital trust. Titling assets as T-by-E or JTWROS could also inadvertently disinherit others. For example, if a person designated Child A as a JTWROS on an asset but not Child B, then Child A would inherit the entire asset at death rather than the asset being split equally between the children under a traditional dispositive plan.
Planning Tip 1
If you hold interests as T-by-E or JTWROS, please advise your estate planning attorney to discuss whether the title of this asset is in accordance with your estate planning objectives.
If a child (or other non-spouse) is added as a joint owner on a JTWROS account, you could be deemed to have made a gift to the joint owner. For example, if you add a child as a co-owner on a JTWROS bank account and under state law the child has an enforceable right to one-half of the account, you will have made an immediate gift of one-half the value of the account when the child’s name was added. Depending on the value of the account, you may be required to file a gift tax return reporting the gift. Even if the child does not have an enforceable right to one-half of the account, a gift will still occur whenever the child withdraws money from the account.
Planning Tip 2
If your goal is to have a child (or other non-spouse) assist with managing the asset, this is better accomplished by either (i) naming that individual as your agent under a power of attorney and titling the asset as TOD or POD to your revocable trust or specified individuals upon your death or (ii) retitling the assets directly in the name of your revocable trust and adding that individual as a co-trustee or successor trustee.
Tenants in Common (TIC)
While all of the owners are alive, a TIC asset is generally owned by the holders in proportion to the amount they contributed to acquiring that asset. When one of the owners dies, his or her TIC interest passes in the same manner as an individually-titled asset.
If your interest in a TIC asset is held in your individual name, then you should consider retitling your interest in the name of your revocable trust or designating a “POD” or “TOD” beneficiary (described below).
Payable on Death (POD)/Transfer on Death (TOD)
A POD or TOD designation, sometimes called a “designated beneficiary title,” is added to an individually-titled account to direct its distribution after the account owner’s death. In naming a specific beneficiary, the asset will be transferred to the designated beneficiary or beneficiaries without passing through probate. Similar to T-by-E and JTWROS titling, POD and TOD designations supersede any instructions in a will and may supersede your revocable trust; provided, however, that if the asset is POD or TOD to your revocable trust, then it will still pass pursuant to the dispositive plan under the revocable trust.