Estate Planning – Are My Accounts Set Up Correctly?

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Did you know that most of the property you own has an account title? The basic way to determine out how property is titled is by asking these questions:

Who owns the property, and what will happen to it when the owner dies?

As we dive into the types of accounts, take a look at your recent banking, investment, mortgage, and other property statements to see how they align with the following descriptions.

You will see the terms ‘will’ and ‘probate’ tossed around in this article. Let’s quickly clarify what these mean:

A will is a drafted estate document that lays out your wishes for the direction of guardianship and personal property after your death, and is often partnered with powers of attorney (medical and financial POA), advance medical directives, directive to physicians (living will), and HIPAA authorization. Consult a licensed estate attorney in your state to help set up or discuss these legal documents.

Probate is the public process by which your state court system administers the direction of your gross estate (what you owned when you died). Your will is submitted to the court and validated, and an executor/executrix is assigned to act out your wishes as directed. If you die without a will, your wishes may not be accurately addressed as you would have liked. The probate process can be long, stressful, and expensive process – depending upon the complexity of your estate and family dynamics. It is best to bypass/avoid this process by setting up your property with appropriate titles and beneficiary designations, as described below.

How can my accounts be set up?

Sole Ownership – Fee Simple

If you own an individual account under your name alone, it is likely titled fee simple. This is complete ownership by one person. Since the property is not shared, the owner has full rights to use, sell, gift, transfer, or bequeath (pass to an heir) the property at his/her discretion. At death, the fair market value of the property is 100% included in the owner’s gross estate and is included in the probate estate. Since this is an after-tax account outside of retirement, it has the benefit of receiving a step (usually up) in cost basis on the date of death – this means that the cost basis (usually the purchase price) of the property is reset, and any previous gains or losses are eliminated.

Tenancy in Common (TIC)

If you own an account along with at least one other person, it may be titled TIC. Each owner holds an undivided interest in the whole property, but they do not necessarily own equal interest. Each owner’s interest can be severed (ended) without the other owners’ consent. At death, the fair market value of the deceased owner’s interest is included in his/her gross estate, and passes through probate. This type of after-tax account also receives a step in basis at death, but only on the deceased owner’s interest in the property.

Joint Tenancy with Right of Survivorship (JTWROS)

If you and your spouse opened up a bank or other investment account together, it is likely titled JTWROS. Like TIC, this is interest in property owned by 2 or more people. Each owner holds an undivided interest in the whole property, and ownership is completely equal. For example, if a property is owned JTWROS by 3 people, they each own 33.3% of the property, regardless of their individual contributions. Each owner shares in the income and expenses equally. The survivorship feature of this account title means that ownership at death passes directly to the other owners, achieving privacy and avoiding probate. Only the deceased owner’s contribution will be included in his/her gross estate, unless owned jointly with a spouse (deemed 50%/50% ownership). If you own a bank or investment account with your spouse, verify that the account is titled JTWROS instead of TIC, so that your share of the property instantly becomes theirs at your death, and vice versa. This type of after-tax account also receives a step in basis at death, but only on the deceased owner’s interest in the property in most states.

Tenancy by the Entirety

This is exactly like JTWROS, but only for married couples. The right of survivorship is implied (avoiding probate) and ownership is always deemed 50%/50% between spouses.

Other Account Types that Avoid Probate

  1. Transfer/Payable on Death (TOD/POD): This account automatically transfers its assets to the named beneficiary, with complete privacy and avoidance of probate. For example, if you opened a TOD with your son as beneficiary, he would receive all of the account assets upon your death, but he would not have any ownership until that time. Be careful not to list a minor child as a beneficiary, as the account would be controlled by a guardian, as designated during the probate process.

  2. Life Insurance: The named beneficiaries on these policies will receive the death benefits upon the insured’s death, passing directly and avoiding probate, usually tax-free.

  3. Retirement Accounts: IRAs, 401(k)s, 403(b)s, annuities, pensions, and the like pass directly to the named primary or contingent beneficiaries, avoiding probate. Unlike the previous accounts discussed, retirement accounts do not receive a step (reset) in cost basis upon the owner’s death since the gains are tax-deferred, and have special inheritance rules for distributions.

  4. 529 College Savings Accounts: Like retirement accounts, these education savings vehicles pass to a named successor owner, with no change of the named beneficiary.

  5. Trusts: Without discussing detailed estate planning considerations, trust property avoids probate and instead passes according to a legal trust agreement – naming the grantor (trust maker), the trustee (trust manager), and the beneficiary (one who benefits). Consult a licensed estate attorney in your state for additional details.

What should I do now?

Make an effort to review your account titles and beneficiary designations every few years, and especially if there is a major life change – such as a new child, marriage, or divorce. You won’t be around to see the end result of your planning, but you can ensure that your intended wishes are directed as accurately as possible.

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