Even if wills and revocable living trusts are drafted to maximize estate savings, titling and beneficiary designations of property may prevent the documents from operating as intended.
Additionally, assets may not pass to the intended beneficiaries if not titled properly.
When two or more people own property, generally the title is either held as joint with rights of survivorship (JWROS) or joint tenants in common (JTIC).
Joint with Rights of Survivorship. When property is owned as JWROS, if one of the owners dies, the surviving joint owners automatically receive control and ownership of the entire property. The assets do not go through the probate process.
- If Mark and Mary own stock as JWROS and Mary dies, Mark will own the stocks and bonds entirely. Mark will receive the stock even if Mary’s will leaves the stock to her son, Manny.
Joint Tenants in Common. When property is owned as JTIC, the deceased owner's fractional share passes by will or revocable living trust. While a JTIC owner has the right to control his share (such as lien, use, sale, partition), in practice, a JTIC may require the consent of the other owners. In the absence of the words, "with rights of survivorship," many states infer that the property is owned JTIC.
- If Mark and Mary own stock as JTIC and Mary's will leaves the stock to her son, Manny, then Manny would receive Mary’s share of stock and would become a JTIC with Mark.
Tenancy by the Entirety. Tenancy by the entirety is a statutory form of ownership similar to joint with rights of survivorship that is only available to a husband and wife. Each spouse owns the entire property so he/she cannot convey it independently, and it cannot be partitioned, providing some degree of asset protection. Not all states have tenancy by the entirety.
Community Property. Other common forms of ownership include community property (with or without rights of survivorship) and separate property. Only a limited number of states operate under the community property system.1 Community property applies to married spouses, and deems property as co-owned regardless of title.
Another potential asset titling problem relates to assets that pass by contract or beneficiary designation, e.g., retirement benefits, IRAs, employee benefits, annuities, and life insurance contracts.
- If Mary names Mark on her IRA beneficiary designation, Mark will receive the IRA, even if her will or her revocable living trust states that the IRA should pass to Manny. In some states, even if Mark is an ex-husband he may receive the IRA.
- It is common for bank accounts and investment accounts to be titled as Payable on Death (POD) or Transfer on Death (TOD).
- Beneficiary designations and financial accounts should be checked frequently to make certain the beneficiary or the ownership is as the owner intends.
- Non-probate assets cannot fund trusts created in a will or a revocable living trust unless the beneficiary designation specifically states the name of the trust. Additionally, certain requirements must be included in the trust document when retirement plans are made payable to trusts.
- Gift Tax - Changes of title may result in gift tax, due to change of ownership.
- Estate Tax - Both probate and non-probate assets owned by the decedent are generally included in the estate.
- When the first owner of community property dies, both the decedent's and the survivor's halves of the community property receive a step up in basis. Therefore, it is important to take care when re-titling community property.
- Change of ownership of a residence may affect homestead exemption and liability insurance.
- FDIC considerations should be considered for bank account changes.
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