It’s hard enough to make the right decision on how to invest your money. But it’s actually just as important to know how to take title to your account. This is also known as “vesting.” And it’s especially important if you are an individual.
Typically, individuals who open accounts do so in their own name, and that’s a huge mistake. At the very least, these people should consider using the Transfer on Death option. I say that because if you die, your assets will be probated. That is a lengthy and costly process involving courts and lawyers fighting over who gets your money after you’re gone. Believe me, you want to avoid this if at all possible.
Now, if you have a living or family trust, you don’t have this problem. As a reminder, this is a document that spells out exactly who gets what and when. If you have a proper trust set up, you might save thousands and thousands of dollars in court costs and save your beneficiaries an enormous amount of time and frustration.
Notable Exception: Even though it’s rarely a good idea to open an asset account in your name alone, it’s great if you can open up credit accounts only in your name. This reduces your family’s liability. Nice.
You might think that if you don’t have a trust, you’re out of luck. Not true. Even if you don’t have a trust, there is a solution and an easy way to avoid probate.
Keep in mind that I’m not an attorney and you really should consult with an attorney on how to take title to your assets. But having said that, you should know about the “Transfer on Death” option, or TOD.
Exception – Like everything else, there are exceptions to the rule. One of the biggest exceptions comes into play when one spouse has debt. In this case it might be smart to keep your accounts separated.
When you take title to your accounts in this manner, you basically set up beneficiaries for your account – just like a retirement account. Most people don’t even know this option is available, which is a shame. As I said, if you are an individual and don’t have a trust, any assets held in your name alone must be probated unless they have a named beneficiary. So consider the solution of the TOD.
Why Banks and Brokerage Firms Won’t Discuss this Option
Banks and brokerage firms typically won‘t give you any advice as to how to title your accounts. They don’t want their “advisors” giving you the wrong advice and then getting sued as a result. They are probably right to be worried.
I met with a friend of mine who has a million dollar account at a huge brokerage firm here in Los Angeles. My buddy is such a large client he has a “private banker” assigned to give him service. Do you think the private banker suggested that my pal consider getting a trust? Nope. Do you think the banker suggested that my buddy open a TOD account until the trust was set up? No…it was the furthest thing from his mind.
It upsets me when people hold themselves out as professionals and then fail to deliver service in a professional manner, but there is nothing I can do about that. But you don’t have to become a victim of these unqualified “dumbkopfs.”
What you have to do is make sure, if you are a single person, to never open an account in your name alone. Make sure that if you have a retirement account, you understand the beneficiary rules. Those include naming a beneficiary. And if you have a non-retirement account, consider using the TOD designation – after consulting with your legal advisor.
If you are single, have you ever received advice on these matters from your advisor? Have you ever heard of the TOD vesting option?
Thanks for this valuable information, Neal! It’s amazing that this isn’t more widely known.
I didn’t realize until my dad passed that you could also name beneficiaries on checking and savings accounts. That really helped the family out with immediate expenses after his death since we didn’t have to wait for the probate process and insurance policies to be processed. Something to think about.
If you are married does your spouse automatically become your beneficiary? I’m married and have a 3yr old. She is my beneficiary on all my accounts.
Moi, beneficiaries are designated by you – they are not automatic. If your three year old daughter is the designated beneficiary, she will be the recipient of the assets of your accounts.
My preference is to name my spouse as the beneficiary of each of my accounts and me hers. My child (who is now an adult) is named as a secondary beneficiary, which means the assets would go to him if my wife was no longer alive.
When you name a child who is younger than the age of majority as a beneficiary then you must determine who will be the custodian of those funds.
Sorry – Where I stated in part, “My child (who is now an adult) is named as a secondary beneficiary . . .” I meant contingent beneficiary – not secondary beneficiary.
Al is correct but keep in mind that in order to name a non-spouse beneficiary of a retirement account, you will probably need the consent of your spouse.
If you fail to name a beneficiary, the beneficiary becomes your estate.Usually a very bad option.
Neal,
Great article. I agree with Spokane. I think a great article would be about what I have found to be confusion related to whether or not to name a trust or a named beneficiary with regard to IRA’s.
OK guys…I’ll write that one shortly….anything for a fellow Pilgrim
I have no problem with TOD (sometimes called POD) accounts.
I do however have a problem with your statement of probate as “A lengthy and costly process….”.
This is an incredibly overbroad statement that is often completely untrue. I practice in Florida. I have lost count of the number of people I have seen who have unnecessarily spent thousands of dollars on trusts when their estate easily qualified for summary administration which is quick, easy and inexpensive.
I have found that most of the people who talk about probate being lengthy, expensive and messy are using these terms as a scare tactic in order to sell unnecessary trust plans that usually cost thousands of dollars more than probate would.
Weston,
Certainly, since I’m not an attorney I don’t have the experience that you have. I can only speak from my experience and the clients who have gone through probate have found it quite painful. Of course, this could be just California. We make everything more difficult out here!
Weston and Neal,
It would be useful to know what state formed the basis for that statement. As Administrator for my parents’ estate, the state involved REALLY wanted me to go the probate route, which I knew was not required and would needlessly cost a great deal- all because my last surviving parent still had an empty safe deposit box at the local bank. All the assets were in POD, TOD and properly named beneficiary status, so I completed the required work and then let the paid status on that hole in space expire. Simple.
One other point – it is usually a bad idea to set up a trust as the beneficiary for an IRA account. This can generate the loss of the ability to stretch that IRA over years and decades.
This could be a subject for one of your future posts.
Good idea Al……
Once in awhile an attorney will suggest that a trust be used for beneficiary but it’s a unique situation.
I agree with you on the TOD option. It is a nice, simple way to ensure assets are transferred outside of probate.
One minor point – in many states probate is as you say – ugly and difficult. In other states probate is substantially easier – WA for example. I guess my point in this is to again agree with you – find expert help in determining the best road to take in estate issues. Trusts are often expensive solutions for problems that may not exist.