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.
Taylor McClish may be reached at (503) 239-3060 or Taylor.McClish@cunamutual.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.
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]