It’s that time of year again when you are besieged with a blizzard of paperwork. Documents such as a W-2, 1099DIV, 1099R, 1099B, 1099INT, K1 and a whole host of other forms and documents are arriving daily. So what do you do? You cram all these forms into a 9×12 envelope and hand them over to your tax preparer hoping you didn’t miss something.
The problem is you may be missing something very important that has nothing to do with income taxes or your accountant. It is one of the most basic tenets of financial planning, the proper titling of your assets. It has been said that possession is nine-tenths of the law but the fact is that title supersedes your will or any other directives you may have in place. So don’t just stuff your tax documents blindly into your manila envelope, take this opportunity to do a thorough review of who really owns your assets.
No Worries if You Don’t Die
The proper titling of assets really does not come into focus unless something unexpected happens. Unexpected events such as divorce, litigation or death can wreak havoc on a financial plan. The first two events at least allow the true owner of the property to be able to dictate the intent of their actions. The third event, death, has a tendency to limit such post-mortem interaction. So as long as you never die, you won’t ever have to worry about the disposition of your assets.
The Name Game
There are a wide variety of ways to hold the title of an asset. Assets can be held by real persons or by entities such as corporations, limited liability companies or trusts. The focus here will be on assets held by living, breathing individuals. Here are a few types of account titles:
Joint Tenant (JT)
A type of ownership of property in which each party owns an undivided interest. Joint tenants have the free, unconstrained right to use the property or asset and upon the death of one joint tenant, the surviving tenants retain full ownership.
Tenancy in Common (TIC)
A type of ownership of property in which each party has an undivided interest, regardless of the percentage of interest. Unlike, Joint tenancy, upon the death of one of the tenants, the percentage of ownership does not pass automatically to the survivor. There needs to be documentation, such as a will, to determine who the decedent’s property reverts to. If there is no will, the courts will determine who receives the survivor’s property.
Tenancy by the Entirety (TIE)
A type of ownership of property only allowed between a husband and a wife. Under a tenancy by the entirety, each tenant my not sell or give away his interest in the property without the consent of the other tenant. Tenants by the Entirety also protect property from individual creditor claims against one of the spouses. In the event of a spouse’s death, the property of the deceased conveys to the surviving spouse.
Where there is a Will there is a Way
It is estimated that nearly 70% of American’s have not executed a will. I have yet to source anything that verifies these numbers, but based upon my 19-years of experience, it appears pretty close. The question is how do individuals plan for the transfer of their assets in the event of their death? Simple, most people without a will use the account title as a cheap alternative to a properly drafted will. But even if properly executed, where there is a will, there is still a way to mess things up.
Even the Best Laid Plans…
Let’s tie this all together. You believe at some distant point in the future you may die so you execute a will. Your will states that all your assets will go to your surviving spouse then to your two adoring children.
Unfortunately, your spouse predeceases you and you are left a widow or widower. The good news is that you are comforted by one of your adoring children who take good care of you. You visit your local bank to update your accounts. The nice personal banker has you fill out paperwork to have your account title changed to you and your adult child as joint tenants. Should the banker not understand your wishes or just not know the difference in titling, things can go horribly wrong.
For illustrative purposes, let’s say the bank held 80% of the surviving parent’s assets. The surviving parent dies and the will states that all assets are to be split 50%-50% between the two siblings. The problem is that the bank account, which is 80% of the estate, now belongs to the one adoring child who was the joint tenant leaving the other sibling with much less than was intended. In a perfect world, the siblings could potentially work out a solution. But after the death of the last surviving parent, things can change and relationships can quickly sour.
Not only does this scenario create estate planning issues, the parent may also have given an inadvertent gift to the child when changing the title to a joint tenant account. Depending on the size of the account, the IRS may have an added interest in all of this as well. The deceptive convenience of adding a child or anyone who is not a spouse to an account title is fraught with potential issues, all of which may not be apparent until after the fact.
We are all going to die at some point, we just don’t know when. Take the time to review all your accounts and their respective titles to ensure they are in alignment with your intentions. A properly executed will that is coordinated with the proper titling of property and assets is essential in creating a strong foundation in your financial plan.
Edward Gjertsen II, CFP®
Mack Investment Securities, Inc.