The best laid plans of mice and men often go astray. An idea or action may appear brilliant at the moment, yet unintended consequences may easily overshadow the original motives and good intentions. An unfortunate example of this is the careless titling of assets. What may seem to be a relatively straightforward and simple decision at first blush, potentially can jeopardize your property, your finances and your estate plan and expose all of these best laid plans to dangers you may not have considered.
Managing money is about choosing appropriate investments and also about taking prudent care of the assets. A common situation we see is a widow who adds her oldest daughter to her household checking account so the daughter can help the mom pay bills.
Depending on how it’s done, the daughter could theoretically drain the account. No one ever thinks this will happen, but the unfortunate truth is that it has occurred. Even if the daughter is an honorable person who wouldn’t touch her mother’s money, she may 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 rights 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 Mom 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 assets, which perhaps represent an inheritance to the daughter and other children, wouldn’t be at risk, because the daughter isn’t an owner. Unintended consequences often can be avoided by simply titling assets in ways that provide ownership rights and 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 percent of the cost and therefore, owns 50 percent of the property, while another owns 40 percent and yet another, 10 percent
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 not of your choosing. 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 United States, there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin and Puerto Rico (a U.S. territory). You will note that these are primarily western states, and this is because these laws are derived from Mexican law acquired from The Spanish. In these instances, 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 rights 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).
As with all financial and legal matters, the importance of working with knowledgeable professionals can never be emphasized enough. You’ve worked hard to accumulate your assets and one misinformed decision can quickly erase a lifetime of otherwise sound saving, investing and planning. This is one more reason why it is so important to have the right team of financial, legal and accounting professionals working together to protect your best interests. Your future is dependant on having the top advisors. Going it alone may be a very expensive decision.
While proper titling is essential during your lifetime, the key to the success of your estate plan is making sure your assets are titled properly all the time.
Darcie Guerin, financial advisor and branch manager, Raymond James & Associates, Inc. 606 Bald Eagle Drive, Suite 401, Marco Island, FL 34145, provides this article. Gulfshore Life magazine named Guerin as one of the Best Personal Wealth Managers in the Southwest Florida area for 2009. If you have questions, e-mail her at Darcie.Guerin@RaymondJames.com or call 389-1041, toll free (866) 343-0882 or visit RaymondJames.com/Darcie. Past performance may not be indicative of future results.