Summit Place Financial Advisors

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1 White Paper No. 1: Why Proper Account Titling And Beneficiary Designations Are So Important In Estate Planning

2 You have prepared your estate documents to ensure that your assets are passed to the next generation according to your wishes. However, your will 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 is a critical, yet often overlooked element of a successful estate plan. It can ensure that your assets pass to your heirs in the way in which you intended and help minimize estate taxes. Vivamus porta est sed est. Many people unwittingly title accounts or designate unnecessary beneficiaries in a way that undermines the estate plan established in their will and trusts. This document will help you avoid these needless errors by explaining the various account titling options and the use of beneficiary designations. Why Account Titling? The way in which an account is titled is legally significant and can supersede your estate plan. Here are the most common account titles and their legal impacts. 1. Individual Accounts This type of account is owned by one person or entity. This choice is the most direct way to assure the wishes in your will prevail. Assets that are titled in your name will pass 2

3 according to your estate plan as long as you do not have a different beneficiary designated. Assets from an individual account will be added to the total estate and will be subject to probate and taxed at the prevailing estate tax rate in the year of the owner s demise. This choice is the simplest way to ensure that your estate plans will prevail. 2. Joint Tenants with Right of Survivorship (JTWROS or JT TEN) 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. However, review the following considerations before you choose this type of title. Joint Tenants is Easy for Non-taxable Estates JTWROS accounts are an easy choice for a simple estate that does not require advanced planning nor exceeds prevailing estate tax thresholds. Assets can automatically and immediately pass to your heir if they are a joint holder, and a responsible joint holder can take over your affairs if you become incapacitated or impaired. Joint Tenants Titling Will Supersede a Will A major problem with JTWROS is that the account will not pass according to the decedent s will and therefore it should rarely be used if you have significant assets. The joint tenant that dies is presumed to own 100 percent 3

4 of the property. As a result, the deceased tenant s family loses the property as it passes to the surviving joint tenant and they also must pay any estate taxes if the joint tenant is not the spouse. Using a Child for Safety and Ease May be a Completed Gift Adding a non-spouse to a JTWROS account often creates a gift tax. For example, if you designate a son or daughter as a joint tenant on a bank account or other property, you make an immediate gift of one-half the value of the property. Also, if you have two children and name one as a joint tenant on a house or bank account for convenience, then that child inherits the property, no matter what your will says. The child is legally entitled to the entire property, and if they choose to share the property with siblings, they may have to pay a gift tax. Adding a Joint Tenant Passes on Cost Basis If you share a piece of property as JTWROS or if you add someone else to the title of your property as JTWROS, that person also gets the tax basis of that property. When the surviving tenant sells the property, the estate loses its "stepup" in basis and is liable for the capital gains tax. 3. Tenants in Common This title is the recommended choice for shared accounts that will be subject to a will. 4

5 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 one of the account holders dies, his interest will pass to whomever he has specified in his will, or to his heirs as dictated by law if he doesn't have an estate plan. The assets are considered owned equally among the number of common tenants on the account or property. Tenants in Common ensures that assets are passed according to your estate plan and is a good choice when there is no need to use Living Trust structures. 4. Convenience Account About half the states have adopted the Uniform Multiple-Person Accounts Act legislation for regulating what we often call convenience accounts. With these accounts there may be multiple holders exclusively for the convenience of the account holder. It may be that you wish to have an adult child help to pay bills and reinvest the amounts in the account from time to time, but you do not intend for the child to inherit the entire account. The convenience account works like a power of attorney, except that the signer s authority is limited to the particular account. There is no right of survivorship; so the account will transfer according to your will. The convenience account is a good choice when you want the security of another trusted person having access to your account. 5. 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 be 5

6 automatically transferred to the designated beneficiaries upon the account holder s death without going through probate. This titling will supersede any instructions in a decedent s will. This may be a good choice to consider if you have no heirs and wish to simply identify beneficiaries. 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, his share is eliminated and is divided among the surviving POD beneficiaries. With the POD registration, you maintain complete control of your assets during your lifetime. The named beneficiaries have no access to or control over the assets as long as you are alive. What is a Beneficiary Designation? Some important assets are transferred exclusively by a beneficiary form, irrespective of instructions in your will. They are referred to as true beneficiary designation assets. These assets include: life insurance, qualified employee benefit plans (such as 401k plans and 403b plans), IRAs and annuities. Having beneficiary designations on these accounts match the rest of your estate plan is critical to having the plan work the way you want. 6

7 Some examples of accounts that are not true beneficiary designation assets are after-tax assets such as bank accounts, CDs held outside of an IRA, and brokerage accounts that are not inside an IRA. You should not put a name of a beneficiary on these types of accounts. If you do, you will be removing these assets from your estate plan. For beneficiary assets, there is a specific form that should be carefully completed identifying your beneficiaries and your desired percentage distribution to each beneficiary. You should also name contingent beneficiaries on these assets. A contingent beneficiary adds extra flexibility to your estate plans. If a named beneficiary pre-deceases you and there is no contingent beneficiary, your assets could be distributed through your estate with higher taxes consequence. A contingent beneficiary designation also adds flexibility to your estate plans allowing a named beneficiary to disclaim a qualified inheritance asset such as an IRA, thereby passing it immediately to the contingent beneficiary. Life changes, so keeping beneficiary forms up to date is equally important. You should maintain a file of copies of all your beneficiary designation forms. You should also consider setting up a reminder to yourself to review these every 5 years and at any major life event such as a birth, death, marriage, or divorce to ensure that they reflect your current wishes. It is imperative that the three elements of the estate planning framework- wills, account titles and beneficiary designations- are implemented in a coordinated manner so that you achieve the goals of your carefully considered estate plan. We recommend that you request a copy of your original account agreements and beneficiary designations from every financial 7

8 institution where you have accounts to ensure that the account titles and beneficiary designations are consistent with your estate plan. Please let us know if you d like additional information or if we can be of any assistance to you or someone you know. 8