What’s in a name? That which we call a rose, by any other name would smell as sweet.
William Shakespeare, Romeo & Juliet
Creating your estate plan can be a major undertaking. It often involves hiring an attorney to draft a will, a health care directive, power(s) of attorney, and possibly one or more trust documents. But all too often, once the estate planning documents have been signed, some important details get overlooked. And details matter, especially with respect to the law. There is one seemingly small detail that often gets forgotten: the consistency between the estate plan and the proper titling of the accounts.
What’s In A Name?
You may think your assets will be fine no matter how you title them. After all, while you are alive, the assets are titled in your name and you are the legal owner. But an account title is not only a name; it is a legal designation that indicates the official ownership and eventual distribution of the account, and it can have a significant impact on taxes, asset protection, and how those assets are distributed after your death. Far too often, affluent people spend a great deal of time – perhaps their entire adult lives – planning their investments, tax strategy, and estate plan, but they fail to take the last critical step of properly titling their assets. Errors in this seemingly insignificant detail can have tragic consequences for your heirs and your legacy.
Who Does This Belong To?
First, consider whether an account belongs to you alone or to you and one or more other people. If you are the sole owner, you might think the simplest option would be to title it as an “individual” account. With an individual account, you would enjoy sole ownership and control over the account while you are alive and competent, and when you pass away, if no beneficiary has been designated the account would be distributed to the beneficiaries of your estate via a court proceeding known as probate. But probate can be expensive, frustrating, and time consuming, so most experts recommend you avoid titling assets in your individual name.
One alternative to individual ownership is tenancy in common (TIC). The TIC designation is a form of joint ownership that indicates each named owner owns a pro rata share of the account. Upon the death of a named owner, that owner’s share transfers only to his or her estate and not to the other owners. Again, this form of titling requires probate for the account, so it is usually best to avoid TIC.
In contrast with TIC, joint tenancy with rights of survivorship (JTWROS) and tenancy by the entirety (TBE) will avoid probate upon the death of one of the owners. Each owner has full access to the account during his or her life, but upon the death of an owner, the decedent’s share accrues to the remaining owners, and not to the estate of the deceased. Ownership as TBE, which is restricted to married couples, offers the additional benefit of protection against the liabilities of one spouse. It should be noted, however, that although Florida recognizes TBE, not all states do.
Trust Me…
If joint ownership is not appropriate for you, consider creating a trust and titling your accounts in the trust’s name or naming the trust as a beneficiary. Generally, the person establishing the trust (the “grantor”) serves as the legal authority over the trust assets (the “trustee”) and is typically the beneficiary of the trust during their lifetime. Upon the death of the grantor, a successor trustee will manage the remaining assets for the named beneficiaries, usually without the need for a probate proceeding. If all your assets are titled in the name of the trust or list the trust as beneficiary, you can be sure your assets will pass according to your wishes.
Designate Your Beneficiary
An alternative to creating a trust is adding a named beneficiary to an account. Such a designation is known as a transfer on death (TOD) or payable on death (POD) account and passes title directly to the named beneficiary immediately upon your death.
TOD/POD designations can be made on bank, brokerage, and retirement accounts (such as IRAs and 401(k)s), and they typically allow the assets to transfer to the beneficiary without a probate proceeding. It is important to note, however, that beneficiary designations will supersede any provisions made elsewhere in a will, trust, or other document, so be sure that your beneficiary designations are consistent with your overall estate plan.
Whether you have spent months creating a complex estate plan or just a few hours drafting a will, it is easy to overlook the seemingly insignificant step of retitling your accounts at the end of the process. But beware, small errors or omissions in titling can lead to immense unintended consequences; the inputs can be 99% correct and still lead to an outcome that is 100% wrong. After your estate documents are signed, ask your attorney for a list of titling and beneficiary designations that must be made, and be sure to include your wealth manager in the titling process. Romeo and Juliet eventually learned that names do matter; even today, ignoring their significance can be tragic.
