An often overlooked part of planning is how assets are registered. Improperly registering assets can lead to various problems, including headaches, costs and even transferring money to the wrong people.
Undoubtedly, the most obvious problem is that there are many different registrations for assets such as bank and investment accounts or even real estate. Accounts can be registered individually, POD (payable on death), TOD (transfer on death), ITF (in trust for) and even JTWROS (joint tenancy with right of survivorship).
A little knowledge about registering assets can really help to prevent future problems.
If you don’t understand the meaning of the registrations, how do you know how to title the assets?
What follows is a brief description to help make informed decisions.
Quite often, an account’s registration dictates how the account is taxed, as well as how the account is transferred at death. There are many cases where property has been transferred, unknowingly, to the wrong people.
This registration would simply be an individual’s name, like “John A. Doe.”
John would pay the income tax for any gains on this account and he would be the sole owner.
Upon his death, this account would have to go through probate to transfer ownership. His executor would include this asset in John A. Doe’s estate.
<Where do problems arise?
Suppose John is married. This poses potential complications.
Most times, John would want this account to go directly to his spouse, Jane. Unfortunately, the law does not assume two married people want assets to transfer between them.
In order for Jane to take the property, she would have to go through the probate process. Most likely she would have to probate his will to have the account transferred to her.
This happens all the time and can result in unnecessary time and expense.
This problem occurs quite often when mutual insurance companies became publicly traded and their policyholders received shares of stock.
If John Doe owned a life insurance policy, this insurance company would not have asked John how his account should be registered. Instead, it just gave him shares of stock.
Upon his death, his wife Jane was surprised that she could not just take the stock.
Adding your spouse’s name to an individually registered account may save a great deal of time and trouble.
JOINT TENANCY WITH RIGHT OF SURVIVORSHIP
This is an account registration between two or more parties and would often appear on a statement as John and Jane Doe, JTWROS.
Essentially, both John and Jane own the property equally during their lifetimes. Upon the death of John or Jane, title passes to the survivor.
<Where do problems arise?
Fairly often, a lawyer, consultant, accountant or adviser recommends that a married adult couple should add one or more children as joint tenants. For example, John and Jane could name their son, James, as a joint tenant, registered as John, Jane and James Doe JTWROS.
People assume the parents will die first and the children (or child) will receive the property.
But they may fail to consider potential matters such as the child’s financial issues, divorce or a child dying before the parents.
In some states, the parents might be required to pay transfer taxes on one-third of the property’s value. This happens more often than you might think.
POD, TOD AND ITF
“Payable on,” transfer on” or “in trust for” registrations are meant to pass accounts directly to the person named. For example, “John Doe, TOD James Doe” would pass John’s assets directly to James upon John Doe’s death.
While these registrations sound simple enough, often there are reasons why you would not want to alter them.
If you plan to change registrations, seek the advice of your attorney if he or she some level of expertise in estate planning.
As usual, a little bit of knowledge can go a long way to avoiding problems down the road.
Paul Marrella is a wealth manager at Marrella Financial Group LLC in Wyomissing, public speaker and author of “What Now? The Widow’s Guide to Financial Independence.” He focuses on providing wealth management and retirement income solutions to successful families in southeastern Pennsylvania and can be reached at www.marrella.com or 610-655-9700.