In your financial planning, you may not pay much attention
to how you hold your assets. However, the way that
assets are titled can be of critical importance. Missteps
can have severe consequences.
On your own
The most basic way to hold assets is in your own name.
Example #1: Wendy Anderson, who is single,
has a bank account in the name of "Wendy Anderson."
Her brokerage account, her directly owned mutual funds,
and her home are also titled this way. This mode of
titling is simple and inexpensive. Moreover, it's
flexible. Wendy can give or bequeath these assets
to whomever she wishes.
There are drawbacks, though. In case of Wendy's incapacity,
these assets might be mismanaged or lost to con artists.
At her death, such assets might have to go through
probate, which can be expensive and time consuming.
If she is sued, assets that Wendy owns outright can
be lost to a settlement or an award for damages. What's
more, if Wendy gets married, her husband may resent
her keeping separate assets.
Some careful planning can reduce the risks of individual
ownership. Wendy might execute a durable power of
attorney that names a trusted person as her agent,
in case of incapacity. A durable power of attorney
enables the selected agent to act for the person creating
the document (the principle) even after the principle
is not mentally competent or physically able to make
decisions. A durable power may be used immediately,
and it remains effective until revoked by the principle
or until the principle's death.
In addition, Wendy can ask to have her bank and investment
accounts titled as "payable on death" or
transfer on death," so that they'll pass to a
beneficiary without going through probate. Ample insurance
can protect her assets - and she'll worry about her
husband's wishes if and when she gets married.
Paired plans
Besides individual ownership, jointly held assets
are common. Typically, title is held as joint tenancy
with right of survivorship (JTWROS).
Example #2: Victor and Tammy Barnes are married.
They hold their home, bank accounts, and investments
as JTWROS. If Victor is the first to die, all of those
assets will automatically pass to Tammy. If Tammy
dies first, Victor inherits. Again, titling assets
as JTWROS is simple and inexpensive. For married couples,
such ownership might lead to a happier home life.
One joint owner can take over if the other is incapacitated.
Moreover, jointly held assets don't go through probate.
There are negative aspects to holding as JTWROS,
however. Perhaps most important, assets held as JTWROS
rob owners of flexibility. They will go to your co-owner
regardless of what your will dictates. For married
couples, that may mean a failure to use an estate
tax exemption at the first death and a large estate
tax obligation if the surviving spouse dies with all
the marital assets.
Generally, JTWROS works well if you absolutely want
your co-owner to inherit that asset. Otherwise, such
titling probably should be kept to a minimum.
Creative thinking
Another way to hold your assets is to transfer them
into an entity you create. This could be a trust ,
a partnership (such as a family limited partnership),
or a limited liability company (LLC). Often, such
entities provide protection from creditors. Many owners
of investment real estate, for example, create an
LLC to hold the property and thus limit liability
from incidents that may occur there. Sophisticated
use of these entities also may provide tax benefits.
However, creating and maintaining entities to own
your assets can be expensive and time consuming. Our
office can help you generate a strategy for using
various forms of asset titling (individual, joint,
entity) to meet your specific goals.
