So, you had your estate documents prepared the way you wanted them. You have ensured that your assets will be passed to the next generation according to your wishes. Right?
Here’s the problem, many people unwittingly title accounts or designate unintended beneficiaries in a way that undermines the estate plan established in their will and trusts.
Wills and trusts are only one part of the framework that dictates how your assets will be distributed after your death. The other important components are account titling and beneficiary designations. Coordinating account titling and beneficiary designations with your will and/or trust is a critical, yet often overlooked, element of a successful estate plan. Failing to coordinate can cause your assets pass in a manner other than the way in which you intended and can lead to increased taxes, disappointment, frustration and even lawsuits among heirs. A good, comprehensive estate plan can avoid these issues.
Wills and trusts pass most assets titled in your individual name to the beneficiaries named in the will or trust document. However, assets such as life insurance, annuities or individual retirement accounts (IRA’s, 401K, Roth, SEP’s, etc.) pass directly to third parties through a beneficiary designation. This is true even if your will or trust says otherwise. Similarly, financial accounts often pass outside of a person’s will or trust in accordance with the terms of the signature card on the account.
The term titling refers to the legal form of asset ownership. Here are the most common account titles and the importance of their legal impact.
- Individual accounts. One person or entity owns this type of account. Assets that are titled in your name alone will pass according to the terms of your will or trust as long as you haven’t designated a different beneficiary. Assets from an individual account will be added to the total estate and will be subject to probate.
- Joint Tenants with right of survivorship (JTWROS). This is one of the most common ways married couples title accounts without giving it a second thought. This type of account will pass directly to the surviving account holder when the first account holder dies regardless of what the first account holder’s will says.
- Spouses often hold bank accounts in JTWROS form. If their wills specify that each of them will give their entire estate to the surviving spouse at death then the JTWROS account presents no problem because the account is passing in accordance with the will. In fact, it is often desirable to hold an account in JTWROS form between spouses because the surviving spouse will have access to the funds in the account immediately at the death of the first spouse rather than having to wait several months for a will to be probated.
- Problems often arise after the death of the first spouse. It is common that the surviving spouse puts one child’s name on the account as a form of convenience so that the child can assist with writing checks and managing the account. Low level employees of the bank usually assist with the signing of the new signature card that adds the child to the account, and, by default, these employees often check the JTWROS box for the customer without understanding the ramifications of the decision that is being made. By choosing JTWROS, the surviving spouse has inadvertently cut out all other children from inheriting a share of the account in favor of the one child whose name is on the account.
- Tenants in common. While all of the account holders are alive, the account is owned by the holders in proportion to the amount they contributed to the account. When you die, your interest will pass to whomever has been specified in your will or to your heirs, as dictated by law, if you don’t have an estate plan rather than to the other account holder.
- Convenience account. About half the states, including Texas, have adopted the Uniform Multiple-Person Accounts Act legislation for regulating what is often called “convenience accounts.” With these accounts, there may be multiple signers exclusively for the convenience of the account holder or owner. You may wish to have an adult child help to pay bills and reinvest the amounts in the account from time to time, but don’t intend for the child to inherit the entire account at your death. The convenience account works like a power of attorney, except that the signer’s authority is limited to the particular account. There’s no right of survivorship; so the account will transfer according to your will at your death. The convenience account is a good choice when you want another trusted person to have access to the account but do not that person to inherit the account at your death. Deposits by convenience signers or accruals to the deposits are not considered as a gift to the account owner.
- Payable on death (POD)/Transfer on death (TOD). Sometimes called a “designated beneficiary title,” this is a designation added to an individually titled account. In specifying a specific beneficiary, the assets will automatically be transferred to the designated beneficiaries on the account holder’s death without going through probate. This titling will supersede any instructions in your will. Unlike a JTWROS account, the beneficiaries will not have access to the account during your lifetime. This designation allows you to specify both multiple beneficiaries and the percentage of assets each will receive. If the POD beneficiary dies before the account holder, their share is eliminated and is divided among the surviving POD beneficiaries.
Anytime your life or circumstances change dramatically, your asset titling and estate planning should be reviewed and, if necessary, updated. Asset titling and beneficiary designations can have income and estate tax implications as well which should be discussed with your estate planning attorney and should be carefully coordinated with your overall estate plan to achieve optimal results. Even if you think you know how your assets are titled, it’s wise to review your titling periodically. Things change or mistakes can be made.
Additionally, a careful review of asset titling and beneficiary designations is particularly important if you have lived in multiple states. Each state may recognize different forms of ownership and transferring an asset to another state could terminate the form of ownership (e.g., moving from a community property state to a common law state).
At Romano & Sumner, we have years of experience working with clients to ensure their Estate Plans pass assets to their heirs in the way in which they intended. Give us a call to schedule a complimentary consultation to review your situation.
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