Why Should I Care About Asset Titling?
For most of us busy with work, family events, chores and hobbies, the last thing we want to do on a weekend is look over who is going to inherit our assets. Nevertheless, optimizing how your assets are titled, in most cases, does not have to be an onerous or expensive undertaking. A few hours efficiently spent now can help your family avoid unnecessary stress, complexity, and cost in the long term.
Below we lay out the basics of titling in Illinois relevant for the most common circumstances and the mistakes you can avoid by prioritizing asset titling.
Avoiding Probate
In Illinois if someone dies with over $100,000 in assets and has failed to legally designate an heir, his or her estate must under statute be reviewed in probate court. This legal process can be protracted as well as costly and is susceptible to disputes between various potential heirs. In addition, probate proceedings and documents are all open to the public. Even if it is not possible to avoid probate with all of your assets, proper titling allows your heirs immediate access to liquid assets such as stocks, bonds and cash.
TOD Accounts
The initial stages of estate planning do not require any special legal document or even much effort on the part of asset owner. It is simple to turn a plain individual bank or brokerage account into a “transfer on death” account. This merely entails naming beneficiaries and their percentage claim on that particular account. You may also name contingent beneficiaries in case the primary beneficiary or beneficiaries are no longer alive when the assets transfer. With most big financial institutions you can complete this process online in a few minutes as long as you know the social security numbers of your beneficiaries. When gathering that information, you can also inform them of your bequeathing intentions. Going forward, beneficiaries can be switched easily as well.
Revocable Trusts
A revocable trust, among other features, sets out how an individual’s assets are to be distributed after death. For tax and control purposes during the person’s lifetime, it acts exactly like a TOD, using the owner’s social security number. And, the terms of the trust may be altered at any time by the owner/trustee. Once the trust is established, the owner who is also the trustee will transfer accounts to sit inside the trust umbrella. Generally, in order to create a revocable trust, you will need an attorney, though in many instances the documents can be standardized to minimize expenses. Revocable trusts are very widely used by people at many asset levels.
Asset Equalization
For married couples, it is worthwhile calculating, from time to time, how much of total household assets are in the name of each spouse as well as those that are co-owned. In the majority of cases, they should seek to apportion the value of assets held outside necessary joint accounts into equal halves. This move enables the couple to fully utilize their individual threshold for estate taxes, which could, under current law, shield as much as $12.5mm from federal levies alone. Equalization also makes it simpler to take advantage of the step up in cost basis allowed by the IRS at death. The surviving spouse can then sell assets and incur no capital gains without having to resort to complex calculations.
There is another important additional benefit to equalization. Any successful litigation or civil judgements against one spouse will have no claim on the assets individually held by the other. For people in professions highly to personal lawsuits, there may be a good case to put more assets in the name of the other spouse.
IRAs & 401Ks
Note that 401k and IRA assets are not eligible to held inside a revocable trust. Placing an IRA and 401k directly in the name of a family member or another person is not permitted either. However, it is important to name beneficiaries for these retirement accounts as well. You can name your trust as a primary or secondary beneficiary of your retirement.
Primary Residence
For a single person owning a primary residence in Illinois the simplest way to hold title to a home is as an individual. For those wanting more privacy it is possible to create a land trust as title holder, but this is not common for the typical homeowner. For married couples in Illinois, and many other states, by far the most frequent option selected is “tenancy by the entirety.” In legal terms the property is owned by the marriage and thus cannot be subject to legal proceedings against just one of the spouses. Tenancy by the entirety in Illinois is only available to married couples for primary residences. Moreover, to take out a mortgage or to sell the property, both parties must consent. Also, when one spouse dies, all of their stake in the property by law instantly passes to the other spouse.
Professional Advice
If you are likely to inherit or bequeath substantial sums or own your business, then you may want to consider going beyond the vehicles discussed above. We always recommend getting advice, even if brief, from an experienced estate attorney and a knowledgeable tax accountant before making major decisions. Reviewing your choices and options every several years with the help of a professional is also advised since both state and federal rules change periodically.
Written By David L. Frank, CFA
The information provided in this article is for informational purposes only and does not constitute financial advice. While the insights and opinions expressed are based on professional experience and current market knowledge, they are not a guarantee of future performance. Readers should consult with a qualified financial advisor to discuss their specific investment needs and objectives before making any investment decisions. The information contained in this article has not been filed with, reviewed by or approved by the SEC or any other United States regulatory or self-regulatory authority.