What Is in a Title Part Two

In my last article, I discussed the importance of proper titles in regards to qualified accounts, such as IRAs, 403bs, Roth IRAs etc.  If you haven’t read it yet but you don’t know the difference between an inherited IRA and a personal IRA, please take a look.

Regardless, today I am going to discuss the different titling of non-qualified accounts, like individual or joint accounts.  We must first point out that there is a huge difference between who governs individual/joint accounts and IRAs.  On the most part, the title of an IRA and the distribution of funds is governed by the federal government, specifically the IRS.  It really doesn’t matter what state you live in.  This is quite different for individual and joint accounts.  The rules of distribution on death are heavily impacted by your state’s laws (and your estate plan).

In fact, you can have a great estate plan, either a will or trust, and it can be negatively impacted by incorrect titling of an account.  With this in mind, I am discussing these items in general terms. Please consult with an estate planner in your state regarding how these items might impact you.

The first designation I want to discuss are TODs or TODDs, which are transfer on death deeds for accounts without beneficiaries, like IRAs, annuities, life insurance, etc.. TODs may be a very effective planning tool.  TODs are different per state so, again, this is a general discussion.  They simply designate that the money in the account will pass on to whomever you name as the recipient(s).  The most favorable aspect of TODs is they money passes without going through probate.  Although this probably will not allow you to avoid probate completely, it will allow your beneficiaries to get to some money without waiting to go through probate.  It is very important to realize TODs typically take precedent over wills and revocable trusts.

Also, they should match your will or trust.  It can cause major problems if there are multiple children but only one child is the beneficiary of a TOD.  If your end goal is that money goes to all your children, it may create a situation where one child receives the money and then has to distribute a proper share to their siblings.  That is no longer an inheritance but either a gift or income to the siblings.

TODs can be very effective but please think them through and make sure they match your will or trust.

Next are joint account titles.  As mentioned above, this is heavily impacted by the state in which you live, specifically if it is under community or common property laws. Below are the major different titles for joint accounts:

• Tenants in Common – Each owner owns a distinct share of the account and the money is distributed upon death based on the owners will or trust. The account must proceed through probate.  One big advantage of a tenants in common is each owner’s share is protected from creditors of the other shareholders.   Thus, if one owner has credit problems, the creditor typically may not go after the other owner’s share.
• Joint Tenancy – Each owner owns an equal share of the account. Like a Tenants in Common, the account must go through probate upon death of either owner (for their share to be distributed).  There is one big difference between the two different accounts, specifically that creditors may go after the shares of both owners.
• Joint Tenants with Right to Survivorships (JTWROS) – Same as a Joint Tenants account except the proceeds at death automatically transfer to the surviving owner without going through probate.

Please note, if you have a revocable trust, be sure to note how your estate planner wants the accounts to be titled.  It might seem logical that they be a JTWROS in a community property state however the trust might want the money from the spouse who is deceased to go into a trust instead of to the spouse.  This is typical in what is described as a AB or ABC trust.

As you can see, proper account titles may matter significantly.  If you haven’t recently, this year is a great time to review your accounts to ensure the titles match your estate plan goals.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.