Articles tagged with: TOD

Importance of TOD & JTWROS Designations

A convenient move that could ward off probate on your accounts.

TOD, JTWROS – what do these obscure acronyms signify? They are shorthand for transfer on death and joint tenancy with right of survivorship – two designations that permit automatic transfer of bank or investment accounts from a deceased spouse to a surviving spouse.1

This automatic transfer of assets reflects a legal tenet called the right of survivorship – the idea that the surviving partner should be the default beneficiary of the account. In some states, a TOD or JTWROS beneficiary designation is even allowed for real property.2

When an account or asset has a TOD or JTWROS designation, the right of survivorship precedes any beneficiary designations made in a will or trust.3

There are advantages to having TOD and JTWROS accounts – and disadvantages as well.

TOD & JTWROS accounts usually avoid probate. As TOD and JTWROS beneficiary designations define a direct route for account transfer, there is rarely any need for such assets to be probated. The involved financial institution has a contractual requirement (per the TOD or JTWROS designation) to pay the balance of the account funds to the surviving partner.4

In unusual instances, an exception may apply: if the deceased account owner has outlived the designated TOD beneficiary or beneficiaries, then the account faces probate.5

What happens if both owners of a JTWROS account pass away at the same time? In such cases, a TOD designation applies (for any named contingent beneficiary).4

To be technically clear, transfer on death signifies a route of asset transfer, while joint tenancy with right of survivorship signifies a form of asset ownership. In a variation on JTWROS called tenants by entirety, both spouses are legally deemed as equal owners of the asset or account while living, with the asset or account eventually transferring to the longer-living spouse.4

Does a TOD or JTWROS designation remove an account from your taxable estate? No. A TOD or JTWROS designation makes those assets non-probate assets, and that may save your executor a little money and time – but it doesn’t take them out of your gross taxable estate.

In fact, 100% of the value of an account with a TOD beneficiary designation will be included in your taxable estate. It varies for accounts titled as JTWROS. If you hold the title to a JTWROS account with your spouse, 50% of its value will be included in your taxable estate. If it is titled as JTWROS with someone besides your spouse, the entire value of the account may go into your taxable estate, unless the other owner has made contributions to the account.6

How about capital gains? JTWROS accounts in common law states typically get a 50% step-up in basis upon the death of one owner. In community property states, the step-up is 100%.6

Could gift tax become a concern? Yes, if the other owner of a JTWROS account is not your spouse. If you change the title on an account to permit JTWROS, you are giving away a percentage of your assets; the non-spouse receives a gift from you. If the amount of the gift exceeds the annual gift tax exclusion, you will need to file a gift tax return for that year. If you retitle the account in the future, so that you are again the sole owner, that constitutes a gift to you on behalf of the former co-owner; they will need to file a gift tax return if the amount of the gift tops the annual exclusion.6

TOD & JTWROS designations are designed to make account transfer easy. They simplify an element of estate strategy.

TOD or JTWROS accounts are not cheap substitutes for wills or trusts. If you have multiple children and name one of them as the TOD beneficiary of an account, that child will get the entire account balance, and the other kids will get nothing. The TOD beneficiary can of course divvy up those assets equally among siblings, but in doing so, that TOD beneficiary may run afoul of the yearly gift tax exclusion.6

As you create your estate, respect the power of TOD & JTWROS designations. Since they override any beneficiary designations made in wills and trusts, you want to double-check any will and trust(s) you have, to make sure that you aren’t sending conflicting messages to your heirs.6

That aside, TOD & JTWROS designations can represent a convenient way to arrange the smooth, orderly transfer of account balances when original account owners pass away.

Mike Moffitt may be reached at 641-782-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty.

Securities and Registered Investment Advisory Services offered through Silver Oak Securities, Inc., Member FINRA/SIPC. Silver Oak Securities, Inc. and Cornerstone Financial Group are separate entities.

Citations.
1 – finra.org/industry/terms-and-acronyms [9/26/18]
2 – investopedia.com/terms/j/jtwros.asp [12/20/18]
3 – thebalance.com/why-beneficiary-designations-override-your-will-2388824 [12/19/18]
4 – washingtonpost.com/business/2018/11/12/transfer-death-deed-may-be-good-instrument-leaving-your-home-your-child-beware-flaws/?noredirect=on&utm_term=.3162fd5503c9 [11/12/18]
5 – thebalance.com/what-is-a-transfer-on-death-or-tod-account-3505253 [12/30/18]
6 – investopedia.com/articles/pf/08/joint-tenancy.asp [3/20/18]

TOD or Living Trust?

A look at two basic methods for shielding assets from probate.

How do you keep assets out of probate? If that estate planning question is on your mind, you should know that there are two basic ways to accomplish that objective.

One, you could create a revocable living trust. You can serve as its trustee, and you can fund it by retitling certain accounts and assets into the name of the trust. A properly written and properly implemented revocable living trust allows you to have complete control over those retitled assets during your lifetime. At your death, the trust becomes irrevocable and the assets within it can pass to your heirs without being probated (but they will be counted in your taxable estate). In most states, assets within a revocable living trust transfer privately, i.e., the trust documents do not have to be publicly filed.1

If that sounds like too much bother, an even simpler way exists. Transfer-on-death (TOD) arrangements may be used to pass certain assets to designated beneficiaries. A beneficiary form states who will directly inherit the asset at your death. Under a TOD arrangement, you keep full control of the asset during your lifetime and pay taxes on any income the asset generates as you own it outright. TOD arrangements require minimal paperwork to establish.2

This is not an either/or decision; you can use both of these estate planning moves in pursuit of the same goal. The question becomes: which assets should transfer via a TOD arrangement versus a trust?

Many investment accounts can be made TOD accounts. Originally, that was not the case – for decades, only bank accounts and certain types of savings bonds could pass to beneficiaries through TOD arrangements. When the Uniform Transfer on Death Security Registration Act became law in the 1980s, the variety of assets that could be transferred through TOD language grew to include certificates of deposit and securities and brokerage accounts.2

Many investment & retirement savings accounts are TOD to begin with. Take IRAs and workplace retirement plans, for example. In the case of those assets, the beneficiary form legally precedes any bequest made in a will.3

The beauty of the TOD arrangement is that the beneficiary form establishes the simplest imaginable path for the asset as it transfers from one owner to another. The risk is that the instruction in the beneficiary form will contradict something you have stated in your will.

One common situation: a parent states in a will that her kids will receive equal percentages of her assets, but due to TOD language, the assets go to the kids not by equal percentage but by account, with the result that the heirs have slightly or even greatly unequal percentages of family wealth. Will they elect to redistribute the assets they have inherited this way, in fairness to one another? Perhaps, and perhaps not.

Placing valuable property items into a living trust makes sense. Real estate, ownership shares, precious metals, pricy collectibles such as fine art, classic cars, antiques, and rare stamps and coins – these are all worthy candidates for inclusion in a living trust. If your net worth happens to run well into the millions, these assets may constitute the bulk of it, and a trust offers a degree of protection for such assets that TOD language cannot. A trust also allows you to name a successor trustee, which TOD language cannot do for you.2

A “pour-over” will usually complements a revocable living trust. As your net worth will presumably keep growing after the trust is implemented, a “pour-over” will may be used to allow your executor to “pour over” assets not already in the trust at your death into the trust. That will mean added privacy for those assets in most states – but the downside is that these “poured-over” assets will be subject to probate.1

Of course, you can add and subtract from the original contents of a revocable living trust as you wish during your lifetime – you can remove assets retitled into it when it was originally created and retitle them again in your name, you can “pour in” new assets, and you can sell or give away specific assets in the trust.4

Is it ever wise to name a trust as the beneficiary of a retirement account? Under three circumstances, it might be worth doing. If you worry about your heirs rapidly spending down your IRA assets, for example, naming a trust as the IRA beneficiary more or less forces them to abide by a stretch IRA strategy. Are there “predators and creditors” who want some of your net worth? That is another reason to consider this move. If you want to leave your retirement account assets to someone who is currently a minor, this idea may be worthwhile as well.4

How complex should your estate planning be? A conversation with a trusted legal or financial professional may help you answer that question, and illuminate whether simple TOD language or a trust is right to keep certain assets away from probate.

Mike Moffitt may be reached at ph 641-782-5577 or email: mikem@cfgiowa.com

Website: www.cfgiowa.com 

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 – individual.troweprice.com/public/Retail/Planning-&-Research/Estate-Planning/Considering-a-Trust/Revocable-Living-Trust [11/10/15]

2 – fdcpa.com/Tax/0807TaxNewsEstatePlanning.htm [11/10/15]

3 – forbes.com/sites/deborahljacobs/2014/01/03/how-to-leave-your-ira-to-those-you-love/ [1/3/14]

4 – nolo.com/legal-encyclopedia/free-books/avoid-probate-book/chapter7-7.html [11/9/15]