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Avoiding Probate Through Account Titling

The manner in which your checking accounts, brokerage accounts, retirement accounts and other similar assets are titled can play a big role in estate planning. When done correctly, the ownership designations of your accounts can increase the chances of your estate being settled quickly and in accordance with your wishes.

Fidelity says joint ownership makes transferring the title easy. If joint ownership is not desired or feasible, an heir can be named as a transfer on death beneficiary (TOD) or a payable on death beneficiary (POD). Each has implications that must be thought through.

Joint ownership gives the undivided right to use of a property, though most states require that ownership be equal. Though title transfer is easy, probate is inevitable if both spouses die simultaneously. If only one owner survives, he or she will need another method to avoid probate after they pass.

There are three types of joint ownership. Joint tenancy with right of survivorship transfers ownership of the property to the other(s) through the right of ownership. Tenancy by entirety is similar to joint tenancy except that it only applies to married couples and, in certain states, same-sex couples. Tenancy in common keeps each ownership within the respective joint owners’ estates. The ownership interest will then be passed to an heir in accordance with a will. Fidelity warns that this will likely lead to probate if established in a common account.

Naming a person as a transfer on death beneficiary or a payable on death beneficiary generally allows the assets to be transferred outside of the probate process. It also can be done easily and without cost. The danger with these designations is that they override a will. In fact, a will can lose most of its effectiveness if a number of accounts are titled as TOD.

There are two other potential dangers to TOD/POD designations, according to Fidelity. If taxes are due, the recipient of the asset will be required to pay them. This could create a situation where the will’s executor may have to contact and collect taxes from each recipient. The second is a change in the asset’s value after a beneficiary has been named. This situation could result in an unintended distribution of the estate where one heir receives an account that has grown more in value than an account titled to a different heir.

Source: “Estate Plan Pitfalls to Avoid,” Fidelity Viewpoints, April 17, 2014.


Discussion

John Dwyer from WI posted 2 months ago:

Do any of these transfer methods have a "Step Up" ramification.
Or are they all equal. Maybe I am using the wrong term. What I mean by step up is at death the value of the investment is reset upon death for the beneficiary.

Comments or guidance is welcome.

John


John Knox from AL posted about 1 month ago:

I think that "step up" is a function of tax law and independent of how the estate is handled through probate or not. Current allows for "step up" for inheritance.


Bur Davis from WA posted about 1 month ago:

I was the executor for my mother's estate upon her death in 2005 in Washington state. My experience was that the basis for all assets was required to be pegged to value at date of death (i.e. stepped up).

Inheritance tax was due on that stepped-up value, not on the original value. On the other hand, the new owner will pay a lower amount of capital gains tax if/when they dispose of the asset, since the basis has been stepped up.


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