Joint tenants with rights of survivorship (JTWROS) accounts, tenants by the entirety, power of attorney, life use, trusts and trustees, transfer on death (TOD), payable on death (POD), IRAs, beneficiaries – so many registrations and name attachments to an account. Are you going to achieve the results you want based on how your accounts are currently registered or titled?
We often hear individuals say they want their estate divided equally among their children. Yet, we hear them say that their checking and savings account only contain the name of one child. This is where unintended consequences come into play.
If an asset or source of income has a named beneficiary, the account will be distributed based on those beneficiaries. Life insurance, IRAs, and other employer retirement plans often have named beneficiaries.
Sometimes, we will hear of a client who says they put one of their children as the beneficiary and expect that that child will disburse the appropriate shares to the other children. This has the potential to create several problems. First, when the distribution is taxable, you are potentially causing the child that receives it to pay much higher taxes than if the disbursement were split between, say, three children. For example, if an IRA account has $225,000 of taxable income that your eldest child distributes in one year, that could push him from the 22% tax bracket to the 35% tax bracket.
If, instead, each child got their $75,000 directly, it may have allowed them each to stay in the 22% tax bracket or possibly the 24% bracket. It also gives everyone the ability to take the funds out on their own terms. Maybe the eldest child elects to take $10,000 a year until the funds run out. The middle child elects to wait 5 years and then take out $25,000 a year until the funds run out. The youngest child decides he wants to purchase a new luxury vehicle and takes it all out in one year.
Besides the potential for more taxes and the ability for each child to make their own decisions about withdrawals, there are potentially other issues. Maybe your eldest child has had a round of bad luck and has some bill collectors after him. They may have rights to all the funds, and there is no chance for disbursements to the others. Possibly, your eldest son was sued and has a judgment against him. Those funds may be taken to satisfy the judgment and not be available for disbursement.
If the beneficiaries of the account had been all three children, the two younger children would get their shares. The eldest child might lose his share to bill collectors or a judgment, but only his share.
It is essential to understand, while you intend that your child would split these assets or investments upon receiving them at your death, the child has no legal responsibility to do so. Too often, we see adversity between siblings because of these types of circumstances. One child believes they are entitled to something different because they feel they did more work or spent more time caring for the parents, or one got more gifts or loans while the parents were alive so got some of their inheritance ahead of time. By having all registrations and beneficiaries reflecting their final designations, all this potential conflict is avoided.
And – I certainly have many cases where a parent said that would not happen among my children only for it to come true after they have passed.
Having a joint account at the bank with your spouse makes a lot of sense. Realize that when one of the owners of a joint account labeled JTWROS dies, the funds automatically belong 100% to the other. That might be fine if the other owner is a spouse. If you have added only one child to a bank account, the funds belong to that child. Those funds are not part of your estate. She does not have to split the bank account funds with her siblings.
We see individuals add one of their children for convenience as they get older to a JTWROS account. Rather than add the child as a joint owner, attach a power of attorney to the account. It does not make the funds belong to the child either now or at death. It gives them the ability to manage the account – sign checks, make deposits, find out information and ask questions, but the funds are not considered the child’s funds. When the parent passes away, the funds will belong to the estate and get split based on the designations in the will.
Rather than a joint account with JTWROS, you can elect a joint account with tenants by the entirety. This means that the deceased account owner’s portion goes into their estate and not to the other owner. This can be advantageous if you need a joint account with someone, but you want your portion to go to someone other than that other owner. Maybe you and your brother have a joint account to manage a property that you own together. If both the property and bank account are labeled as tenants by the entirety, your portion can be left to your spouse in the will and not go to your brother.
If you add a power of attorney rather than the joint account owner, you can also elect to add a TOD or POD designation to the account. Transfer on Death (TOD) is generally used with accounts held at a financial investment institution. For example, a non-retirement account that you hold at AssetMark can have a TOD designation. A payable on death (POD) designation is typically used with a bank account. Some banks use “entrust for” instead of POD.
All three designations have the same impact. No funds belong to the designated TOD or POD while the owner of the account is alive. When the owner passes away, the individual(s) simply needs to show a death certificate, and the funds will be disbursed. There is no need for the funds to pass through the estate. It is like having named a beneficiary on an account.
Probate is the act of having your will declared before the courts as to your last will and testament. Your executor or administrator is appointed and required to fulfill your wishes contained within the will. This can be a costly affair since attorneys get involved, accounts must be settled, tax returns and other legal documents may have to be filed. We often see legal fees exceeding $5000 for the settlement of an estate.
If you register accounts correctly, it is possible to avoid probate and all assets to be directly given to those you would like to have them. When someone passes away, how an account is registered determines whom those funds belong to. The last in-line of determining how an asset will be distributed is a will.
- The funds go directly to the beneficiaries if a beneficiary is named, like on life insurance, retirement accounts, and annuities.
- A trust has trustees who manage the account while the trust remains in force. A trust also has beneficiaries. When a trust ends, frequently at the death of an individual, the remaining assets go directly to those beneficiaries and do not need to pass through an estate.
- If an account has a TOD or POD designation, the funds go directly to the named individuals.
- For real estate, to avoid probate normally means the real estate owner is generally either a trust or has been changed to another owner. Often, we see parents transfer their primary residence to their children and retain life use. The life use option says that the parents can stay in residence as long as they want. Once they vacate the property, the children can then do with the property as they wish. Because the parents do not own the residence at their death, it would not be probated.
If the account or asset is in the deceased individual’s name with no designated beneficiaries, it will be put into the estate. If any assets need to be placed into the estate, this is when probate needs to happen. Those assets placed in the estate will be pass by what the will says.
It is essential to review the registrations on your accounts periodically. Make sure that accounts will pass how you genuinely want them to pass. It is also essential to review the beneficiaries on your accounts to ensure that funds and assets will pass precisely how you want them to pass. This review becomes especially important when a life-changing event occurs – when a marriage or divorce occurs when death or birth occurs, or if an estrangement occurs. As you become more aware of the spending personalities of your children, you may decide that assets should pass over time rather than in one lump sum.
Walking through account registrations, beneficiaries, and your concerns about how the transfer of your assets is part of the estate planning activities that Planning with Purpose performs to make sure everything truly happens the way you want it to happen. Please reach out and let us help if you need assistance.