If you own property or financial accounts with multiple individuals, you have several options for ensuring that the survivors continue to own these assets after your death. It's important to understand how these commonly used joint ownership, or joint titling, designations work, and the pluses and minuses of using them.
First, let's go over the three basic forms of joint ownership.
Joint tenancy: Typically referred to as JTWROS (joint tenancy with right of survivorship), this is the most common form of titling property that two or more people own. When one owner dies, ownership automatically transfers to the surviving owner(s) through an automatic right of survivorship.
Tenancy by entirety: This form of joint ownership works just like JTWROS, but it can be used only for property held by married couples, and by same-sex couples in some states.
Tenancy in common: This form of ownership doesn't include an automatic right of survivorship. Instead, when an owner dies, his interest in the property becomes part of his estate and ownership passes according to instructions in his will. If the decedent had no will, then his portion of the jointly owned property will be transferred according to his state's laws of intestate succession.
The advantages of joint titling of accounts or property are that it's quick and easy to set up, ownership transfer after one owner dies is simple and it can apply to many types of property.
But joint titling also entails some significant disadvantages.
First, the last surviving joint owner will need a will or beneficiary designation in order to ensure his heirs receive the property. Also, if all joint owners die at the same time, each of them should have a will to designate how each wants their portion of the jointly owned property transferred. And in most states, joint ownership is presumed to be equal (regardless of each joint owner's contributions), unless you use the tenancy-in-common form of ownership.
Finally, joint ownership give each owner an undivided right to use the property, so think carefully about who you include as a joint owner on your property.
Instead of using joint ownership, a simple alternative for ensuring who will inherit specific assets or financial accounts is to use payable-on-death (POD) or transfer-on-death (TOD) designations. These are essentially beneficiary designations that can be added to many types of financial accounts. As the names suggest, POD or TOD are simple ways to designate others as beneficiaries on different types of property, including bank accounts, investment accounts, vehicle titles and in some cases, real property.
The downside of using a POD or TOD is that if you later get a will that designates who inherits your assets but forget to review or remove these POD or TOD designations. In that case, POD or TOD designations override your will and can render it ineffective.
On the topic of using beneficiary designations in general, you should keep in mind several examples of what can go wrong and why you should use them carefully and keep them up to date.
For example, let's say you name a child as your beneficiary and later you have another child. If you fail to update the beneficiary designation, the child not designated will not receive any share of the account or property. Also, if you don't revise POD or TOD designations after a divorce, an ex-spouse can receive the property at your death.
Also keep in mind that under federal law, if you're married, your spouse will automatically inherit your 401(k) plan account, regardless of what your beneficiary designation for this account may state. If you remarry, your new spouse would inherit all of your 401(k) plan account, which can cut out children from your first marriage. If you want to leave your 401(k) plan to your children instead, your new spouse must sign a notarized consent to your designation to name your children (or anyone else) as beneficiary.
Finally, make sure to always name a beneficiary for your IRAs. If you don't, this can cause your beneficiaries to pay taxes on the account much sooner. That's because IRAs without a specifically named beneficiary are transferred to heirs as part of the probate estate and must be distributed and taxed within five years. If instead you name beneficiaries, they retain the option to take distributions from the IRA over their life expectancy.