The Importance of Properly Titling Assets for Estate Planning Purposes
There are different ways to pass assets to your heirs at your death. In many states, the owner will simply allow the assets to pass pursuant to the terms of his or her will, which requires an estate administration (probate). In most cases though, it is desirable to avoid probate. In order to avoid probate, the owner of the asset must change the title from the owner’s individual name.
Revocable Trust Agreement
To avoid probate, it is generally preferred to create a revocable trust agreement. Because the trust will be the new owner of the assets, the assets will pass pursuant to the terms of the trust, without probate at the death of the grantor of the trust. Once a trust has been created, it is essential that the owner of assets fund the trust by retitling the assets into the name of the trust. For example, John Doe should change his accounts to read “John Doe, Trustee of the John Doe Revocable Trust.”
Payable on Death and Transfer on Death Accounts
Probate may be avoided by creating accounts that are payable on death (POD) or transfer on death (TOD). In essence, the owner of the account remains as the individual owner but has now added a beneficiary designation. As an example, John Doe bank account may now be John Doe bank account POD Baby Doe 1 and Baby Doe 2. These accounts are appropriate where there are few beneficiaries, all of whom are responsible adults. It differs from a trust because the terms of distributions cannot be tailored to the grantor’s specific needs. They are payable upon a claim form being submitted to the financial institution.
Joint Tenancy with the Right of Survivorship
A third way to avoid probate is to create a joint tenancy with the right of survivorship. In a joint tenancy with the right of survivorship, when one tenant dies the remaining tenants become the owners. For example, if the account is titled John Doe, Baby Doe 1 and Baby Doe 2, joint tenants with right of survivorship (JTWROS), and John Doe dies, Baby Doe 1 and Baby Doe 2 will now be equal owners. Unless they change the title, the title will remain joint tenants with the right of survivorship, and when one of them dies the survivor will be the only owner.
At first blush, JTWROS may seem to be attractive for ease of administration. There are, however, several pitfalls to this change in ownership. Once ownership is changed, the tenants have equal rights. Either tenant may be able to withdraw from the account at any time. Moreover, the account now becomes subject to the creditors of each joint tenant. If Baby Doe 1 goes bankrupt, the bankruptcy creditors will be able to force a division of the account and lay claim to at least a portion of it. Also, if the gift is a gift of real estate, a taxable gift may occur at the time of retitling the asset. If it is a gift of a financial account, a taxable gift will occur when the account is drawn upon by the new joint owner. In the opinion of the author, joint tenants with right of survivorship should only be used by a married couple. In some states, this would be known as a tenancy by the entirety, which would add a level of asset protection not available to non-married couples.
The primary reason for retitling assets in estate planning is to avoid probate. Probate involves judicial oversight in compliance with many court rules and statutes. The process may be a prolonged process in which each of the rules needs to be followed in sequence. Sometimes the probate process is more desirable, especially when there are complex issues and complex personalities, court oversight may be beneficial. However, in most cases, probate avoidance is preferred. When using a revocable trust agreement, the trust has advantages over a will, aside from avoiding probate. If the grantor of the trust becomes incapacitated, generally the trust will provide for a successor trustee who can administer the assets in the trust. Additionally, a will becomes a public document when an estate administration commences. The trust has the advantage that it is a private document that only needs to be shared with the appropriate beneficiaries.
When assets are retitled in a trust, TOD account or a JTWROS, the administration of the assets at death is eased. The waiting time for receiving the funds is shortened and, generally, but not always, forms to access to the funds are easily submitted. Although JTWROS is generally the last accounts to be utilized, they are ideal accounts to provide funds for expenses incurred at and after the death of the owner. A small JTWROS account may be desirable to pay funeral expenses, expenses associated with the last illness and small bills such as utility bills that are payable after the death of the owner of the account.
Change in ownership of accounts generally does not have any adverse tax consequences, unless the estate would be subject to a federal or state inheritance or estate taxes. Every rule has an exception. Changing the title to tax-deferred accounts such as retirement accounts and annuities should only be undertaken with the advice of a tax advisor or a financial planner. This is especially true if the transferor is married. Any creation of JTWROS accounts, that are substantial, may have adverse gift tax consequences and, potentially, adverse tax basis consequences. If the gift is completed, the recipient of the gift will take the transferor’s basis in the asset. If the gift is not completed until the death of the owner, the recipient of the gift will receive a new step-up basis in the asset. The stepped-up basis will minimize, or potentially eliminate capital gains tax on the sale of such an asset.
Properly Funding Revocable Trusts
If a revocable trust is created, it is essential that it be funded. It is very common to find wonderfully drafted trusts, which have never been funded. If the trust is never funded, it will fail to avoid probate. It is essential to have an attorney provide assistance or instructions in funding the trust, especially if retitling real estate into a trust. The attorney can assist in providing the proper title for the trust and to make sure the trust is referenced properly in the various accounts. It would not be unusual to create new checking and savings accounts within the trust. While these trust accounts are being set up, the grantor of the trust should phase out direct deposits and bill payments from the old accounts and transfer them to the new accounts. After the new accounts are fully established, the old accounts should be closed. It is not uncommon for married couples to leave one joint checking account outside of the trust to pay household bills. While this is permissible, the goal should be to move all accounts within the trust.
Disclosure of Assets
In order to ease administration at death, the heirs should preferably be made aware of the assets owned. Some individuals prefer not to let their heirs know of their assets while living, while others are willing to share. An up to date list of assets, their location, and contact information should be kept in a safe place, preferably with a copy of the estate planning documents. Included in this list should be a list of all passwords for all online accounts. In this regard, the estate planning documents should allow the fiduciary access to all online accounts. If accounts are maintained outside of a brokerage firm, the cost basis of various assets should be provided for the beneficiaries, although, as noted above, the beneficiaries will most likely receive a step-up in basis at the owner’s death. In addition to the asset list, it would be beneficial to have a list of recurring bills that need to be paid and note whether they are automatically paid to a bank or credit card.
There are many ways to pass assets on to any heir at one’s death. Through a will, trust, POD or TOD account or a joint account. There is no one correct way to leave assets. It is up to each individual. Oftentimes, a combination of methods will be used to achieve the account owner’s goals at his or her death. For example, it is recommended to have a simple will, known as a “pour-over” will to be used in conjunction with a trust. If all the assets are in the trust, there will be no reason to probate the will. However, it is there as a safety valve if needed. It is important to understand that language in a will or trust, will not override a beneficiary designation or joint tenancy. Such designations are contractual in nature and can only be changed by complying with the rules of the financial institution that maintains the accounts.
When undertaking estate planning, it is the opportune time to take an inventory of your assets, how they are owned and check to make sure your beneficiaries are properly designated.
About the Author
Eric Gurgold serves as Chair of the Estate Planning and Administration division and is Board Certified in Wills, Trusts & Estates by The Florida Bar. For over 25 years, Eric has concentrated his law practice in the areas of estate planning and administration, elder law, probate litigation, title insurance claims related to probate issues, business law and taxation. He assists clients in the preparation of wills, trusts, family limited partnerships, inventories, inheritance and estate tax returns, as well as providing counsel to minimize income and estate taxes. Eric has been honored by Florida Super Lawyers® (2013—2017) and is AV rated by Martindale Hubbell. Eric may be reached at 239-344-1162 or by email firstname.lastname@example.org.