Estate planning is the process of determining how your assets will be managed and distributed upon death. While touching on this during the financial planning process, we discuss the importance of titling assets properly to avoid probate.

Probate is a court process that is public, expensive, and can take months, if not years, to complete. In order to make things as smooth as possible for family and friends, you must name beneficiary designations (primary and contingent) for retirement accounts and life insurance. Your remaining assets need to be titled properly. This guide will help you understand your options.

Individual

Individually titled assets are in your name only. Upon death, the asset will be subject to probate and distributed according to your Will.

Subject to Probate: Yes

Distribution After Death: Passes according to the instructions outlined in your Will.

Note: Individually held accounts are not typically recommended. There are better ways to title your assets that avoid probate and offer more control over the distribution of your assets.

Payable-on-Death (POD) or Transfer-on-Death (TOD)

POD and TOD are similar but POD is typically used for bank assets and TOD for brokerage assets. Like an Individual account, TOD / POD accounts are in your name only until death. After death, the beneficiary you listed on the POD / TOD form inherits the account directly, bypassing probate and superseding your Will (even if your Will has different instructions). The beneficiary listed does not have access to the account while you are alive.

Subject to Probate: No

Distribution After Death: Named beneficiary on the POD or TOD form.

Note: Perhaps you have a separate property account that is in your name only (such as an inheritance), but you want your spouse to receive the money upon your death. You should remain the sole account owner and complete a POD or TOD form with your spouse as the beneficiary.

This is not a good option for people who have a minor child listed as the beneficiary. If the child is still a minor when the parents die, a financial guardian would be appointed by the court. The guardian would need to report back to the court periodically to justify that every transaction in the account was for the benefit of the child. This is time-consuming and expensive. Therefore, it is recommended that those with minor children as beneficiaries have assets flow to a Trust instead, with a Trustee (named by the parents versus the court) to oversee the asset distribution.

Joint Tenants with Rights of Survivorship (JTWROS) or Community Property with Rights of Survivorship (CPWROS)

This is a joint (50/50) account with the two owners listed. Upon the death of the first owner, the account passes automatically to the second owner. The transfer avoids probate and supersedes the Will (even if the Will has different instructions). Check with your estate planning attorney, but for married couples or registered domestic partners living in a community property state, such as California, you may consider CPWROS versus JTWROS. With CPWROS, the asset receives a “step-up” in cost basis, whereas only the decedent’s portion (50%) would receive a “step-up” in cost basis when held as JTWROS.

A “step-up” in cost basis means that if your account value is $100K and the cost basis is $50K at death, the cost basis would be adjusted to $100K and the surviving account owner can sell the asset for no taxable gain (versus $50K taxable gain if you sold prior to death).

Subject to Probate: No

Distribution After Death: Transfers directly to the second account owner.

Note: Similar to the TOD / POD, this could be a good option for those that have no plans to create a Trust. It is NOT recommended to be joint on an account with someone whom you do not trust completely. For example, if you are a parent and list your adult child as joint on the account, your child can distribute money at any time and if their assets become subject to creditors, the joint account could be in jeopardy. In that situation, having the parent remain the sole account owner with the adult child listed as the beneficiary on a TOD / POD form is more appropriate.

Trust

Once you have a Trust created by an attorney, you will be recommended to title your non-retirement and non-life insurance accounts, including your home, into the name of the Trust. Typically, an attorney will create a “Pour Over Will” to catch any accounts that weren’t named in the Trust, but don’t be entirely dependent on this. For example, pour-over assets over $184,500 can still be subject to probate in California (this changes periodically and varies by state).

Subject to Probate: No

Distribution After Death: Follows the instructions outlined in the Trust

Note: This is ideal for people who want more efficiency, privacy, and control over the distribution of their assets. For larger and more complicated estates, a Trust will also save heirs money on estate taxes and probate fees.

Putting it all together

Work with your financial planner and estate planning attorney to be clear on how you want your assets to flow after death. Ensure that your assets are titled appropriately to meet those goals. I organize this for my financial planning clients in a simple Excel spreadsheet to make it clear how everything would flow after death. This also makes it easier to spot errors, such as new accounts that are opened without the correct titling or beneficiaries that need to be changed.

originally published 6/22/2021

Linda Rogers, CFP®, EA, MSBA is the owner and founder of Planning Within Reach, LLC (PWR). Originally from New Jersey, Linda services clients throughout San Diego county and nationwide. She leads the design of PWR's investment portfolios which utilize broad, low-cost investments that integrate environmentally, socially, and governance (ESG) factors.

Planning Within Reach, LLC (PWR) is a fee-only and fiduciary wealth management firm offering one-time comprehensive financial planning, ongoing impact-focused investment management and tax preparation services in San Diego and nationwide. PWR is a woman-owned firm that specializes in busy professionals and impact investors. Planning Within Reach, LLC and their advisors do not receive commissions and do not hold any insurance licenses or brokerage relationships.