It may not seem to be a very important decision at the time, but careless titling of your assets can imperil your property, your finances and your estate plan.
Imagine a widow who adds her eldest daughter to her substantial checking account so that she can assist her in paying bills. Depending on how it’s done, the daughter could drain the account. Even if the daughter is an honorable person who wouldn’t touch her mother’s money, she might get divorced or be sued by a creditor. Suddenly, the account is a vulnerable asset because it was set up as a joint tenants with right of survivorship (J.T.W.R.O.S.) account.
The widow could have accomplished her purpose by adding the daughter as an account signatory without ownership rights, or by granting her a power of attorney that authorized her to act on her mother’s behalf.
While the widow should still keep a close eye on her account if the daughter had been granted signatory rights, she could easily withdraw that privilege, because ownership of the account would have remained solely with the mother. If the daughter were to be sued, the checking account, which perhaps represents an inheritance to the daughter and other children, wouldn’t be at risk because the daughter isn’t an owner.
Unwanted consequences of financial collaboration often can be avoided by simply titling assets in ways that wrap your ownership rights in maximum protection.
You can, of course, own property by yourself as “sole and separate property.” You might want to retain this ownership title if you owned the property before marriage, received it because of a relative’s will or purchased it with funds that were yours alone. If you keep it separate and later divorce, no one else has a claim.
There are several ways to handle the titles of joint property. The most common for married couples is joint tenancy. All co-owners own the same percentage of interest, have equal rights and responsibilities, and must agree on any property sale. If one tenant dies, the property automatically goes to the other(s). Ownership transfer occurs outside of probate court.
The “tenants in common” arrangement gives each co-owner controlling interest in the property, often along the lines of what was provided. One might have paid 50% of the cost and therefore owns 50% of the property, while another owns 40% and yet another 10%.
A potential drawback to this arrangement is that individual ownerships can be transferred to others without the consent of the existing owners, so it is at least theoretically possible that you could end up jointly owning property with someone you dislike. Each tenant can will his or her property to anyone, so that sort of property transfer will have to go through probate court.
In the nine community property states, spouses have equal interests in the property. When one dies, the interest of that person goes to the designated heir, while the surviving property owner retains his or her interest.
Some states have a “community property with right of survivorship” arrangement that is similar to the joint tenancy title – the surviving spouse becomes owner of the entire property.
Some non-community property states allow “tenants by the entireties,” wherein spouses have equal interests and rights in the property. Each effectively owns the entire property, which can provide some legal protections against creditors (some states restrict this arrangement to primary residences only).
While proper titling is essential during your lifetime, making sure your assets are titled properly can be key to the success of your estate plan.
Material prepared by Raymond James for use by its financial advisors. Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC. Hall Sumner is a Financial Advisor with Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC located at 2015 Boundary Street, Suite 220, Beaufort SC 29902. He can be contacted at 843-379-6100 or firstname.lastname@example.org or visit our website at: www.tlswealthmanagement.com.