The way your assets are distributed into accounts, and, specifically, the way those accounts are titled, can directly affect your estate plan.

Transferring Assets to Your Next Generation

An essential piece of the financial planning process is ensuring that your assets will pass to the next generation according to your wishes. There are three ways your accounts can be passed to your heirs:

  1. Will
  2. Contract
  3. Law

Wills and trusts pass most accounts titled in your individual name to the beneficiaries named in the will or trust document. Keep in mind, a will does not avoid probate. Before it becomes effective, every will must be “admitted” by the probate court in the county where a person resided at his or her death. However, assets such as life insurance, annuities, or individual retirement accounts pass directly to third parties through a beneficiary designation. This is true even if your will or trust says otherwise.

Understanding Account Titles

Here are the most common account titles, besides individual accounts, and the importance of their impact.

Joint Tenants with Right of Survivorship (JTWROS)

This is one of the most common ways married couples title accounts. This type of account will pass directly to the surviving account holder when the first account holder dies, regardless of what the first account holder’s will says. In fact, it is often desirable to hold an account in JTWROS form between spouses, because the surviving spouse will have access to the funds in the account immediately at the death of the first spouse, rather than having to wait several months for a will to be probated.

Transfer on Death (TOD)

Almost every state has adopted the Uniform Transfer-on-Death Securities Registration Act, a law that lets you name someone to inherit your accounts without probate. It works very much like a payable on death bank account. This is a designation added to an individually-titled account. In appointing a specific beneficiary, the account will automatically be transferred to the designated beneficiaries on the account holder’s death without going through probate. This is done simply by providing proof of death and some identification to the financial institution. This titling will supersede any instructions in your will.

Unlike a JTWROS account, the beneficiaries will not have access to the account during your lifetime. This designation allows you to specify both multiple beneficiaries and the percentage of assets each will receive. If the payable on death (POD) beneficiary dies before the account holder, their share is eliminated and is divided among the surviving POD beneficiaries. A transfer on death (TOD) designation can be used only to transfer certain assets. Some states will allow you only to transfer securities, while other states allow TOD designations to transfer land, cars, and other assets. The TOD designation is not available for all assets in all states. What may be registered varies widely.

Transfer-on-Death Deeds for Real Estate

In many states, you can prepare a deed now, but have it take effect only at your death. These transfer-on-death deeds must be prepared, signed, notarized, and recorded (filed in the county land records office) just like a regular deed. But unlike a regular deed, you can revoke a transfer on-death deed. The deed must expressly state that it does not take effect until death.

Beneficiary Designations

When you open a retirement plan account such as an IRA or 401(k), or purchase an insurance solution such as life insurance or an annuity, the forms you fill out will ask you to name a beneficiary for the account. After your death, the beneficiary you named can claim the money directly from the account custodian.

Surviving spouses may have more options when it comes to withdrawing the money than other beneficiaries. For retirement accounts, if you're single, you're free to choose whomever you want as the beneficiary. If you're married, your spouse may have rights to some or all of the money.

A Note About Life Insurance Ownership and Beneficiaries

Life insurance proceeds may be reduced by estate taxes. The general rule is that life insurance proceeds are subject to the contract owner’s federal estate tax and, depending on your state's laws, state estate tax as well. An Irrevocable Life Insurance Trust (ILIT) is a trust primarily set up to hold one or more life insurance policies. The main purpose of an ILIT is to avoid federal estate tax.

If the trust is drafted and funded properly, your loved ones should receive all of your life insurance proceeds, undiminished by estate tax. If you name the ILIT as the beneficiary of your life insurance policy, your family will ultimately receive the proceeds because they will be the named beneficiaries of the ILIT. This way, there is no danger that the proceeds will end up in your estate.

Living Trust

A living trust is a popular estate planning tool that lets you retain control over the trust property while you are alive, and pass trust property outside of probate when you die. Assets in the living trust do not pass through your will when you die. Instead, they are distributed by the trustee according to the terms you establish in the trust.

Also, the assets in the trust are not part of your probate estate. This may get them into the hands of your beneficiaries faster or, if you desire, provide that the assets be held until the beneficiaries meet certain criteria or attain a certain age. Since the trust is not subject to probate, the terms of the trust are private. A revocable living trust does not minimize income, gift, or estate taxes, nor does it shelter trust assets from creditors in most cases.

Are your estate plan and beneficiary designations up-to-date?

Anytime there is a change in your life circumstances, the titling of your accounts and your estate plan should be reviewed and, if necessary, updated. Account titling and beneficiary designations can have income and estate tax implications as well, which should be discussed with your personal legal and tax counsel. We can help ensure that your titling and beneficiary designations are reviewed periodically.

Working With Janney

Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile.

When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts.

For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

By establishing a relationship with us, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences.

Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.

Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

About the author

Jack Cintorino

Vice President & Senior Financial Planner

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