Understanding the Implications of How You Hold Title to Your Assets - Part 2

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Posted on Thursday, January 26, 2023 in Financial Management & Trust Services

In our 2022 third quarter newsletter, we discussed How You Hold Title to Your Assets and how important asset titling is. In this edition we will cover the different options to ensure your property and investments are passed down to your intended heirs. 

Passage of assets upon death

The way in which assets are titled determines who controls the assets, tax consequences, whether the assets are subject to creditors’ claims, and who will receive the assets once you pass away. These are all important aspects of estate planning. Understanding the pros and cons of each asset titling option helps your heirs receive assets according to your wishes.

For Iowa residents, at death, property passes to new owners one of five ways: 

• Passing by law. Property owned by two individuals (commonly, husband and wife) titled as Joint Tenants with Rights of Survivorship passes to the survivor at the death of the first individual. For instance, using joint ownership for the family home is a simple way to help the survivor continue as normal as possible while the decedent’s estate is being settled. However, joint ownership may eliminate some flexibility in transferring assets that may help minimize estate taxes. In addition, assets can be attached by creditors of either joint tenant.
• Passing by beneficiary designation. Assets that have a designated beneficiary pass directly to the named beneficiary without going through probate. These assets typically, include life insurance, annuities, and qualified retirement plans (IRA, 401(k), 403(b), or Roth IRA).
• Passing through probate. Probate is a court-supervised legal process to ensure all estate taxes and liabilities of the decedent have been paid. The following asset titles pass according to the probate process and the directions of the decedent’s Will.

a. Tenants in Common: Individuals own property in a named percentage allocation. The individuals need not be related, and the ownership can be any percentage allocation.

b. Community Property: If property is owned as Community Property, each individual owns a one-half interest in the asset. At death, the property passes to the deceased’s beneficiaries according to their Will and does not pass to the surviving individual.

c. Sole Property: This includes property owned by an individual before marriage or property acquired through gifts or inheritances.

• Passing through a trust. Assets held by a trust generally avoid the probate process. The common trust for estate planning is the Revocable Living Trust. In addition to avoiding probate, it has the advantage of providing management of funds for the heirs for some time after the decedent’s death.
• Passing through intestacy. If there is no Will, state probate or intestacy laws will determine to whom these assets pass. In general, the order of inheritance is:

1. to a surviving spouse;
2. if no spouse, then children;
3. if no children, then parents;
4. if no surviving parents, then siblings;
5. if no siblings, then aunts, and uncles, etc.

Which method of titling assets is right for you? 

Each estate is unique. For assistance in determining an asset titling strategy that addresses your wishes and optimizes your estate plan, talk to your trust representative or attorney. They can help you make well-informed decisions that are right for you and your heirs.