When an individual acquires ownership of an asset – whether it is a home, a motor vehicle, a boat, or any other type of property – it is important to understand the significance of various types of ownership designations. Ownership of an asset by one individual is a simple concept. However, it is often desirable to have two or more owners of a particular asset. At Horizon Trust & Investment Management, we are often asked for advice on this subject by our clients.
Why is it important to exercise care in designating ownership? Two reasons:
In the case of personal property, the rules are similar, but not identical. Property that has a title – a car, boat or RV, for instance, is titled using the same designations as real property – joint tenants or tenants in common. The same is true for investment assets such as brokerage accounts or mutual fund accounts. With a bank account, there is one important difference from other types of assets – unless the account has a particular restriction, each joint owner has the power to withdraw funds. Appropriate titling is just as important with personal property as it is with real estate. For instance, if you and a friend decide to go halves on that beautiful boat that you can’t afford on your own, should you hold the title as joint tenants (your friend becomes the 100% owner on your death) or as tenants in common?
A “Transfer on Death” or “Pay on Death” designation is often used for bank or brokerage assets by an individual who wants complete control over the asset during lifetime, but wants the asset to pass directly to a designated individual at death. This avoids the requirement of obtaining another person’s consent to use or sell the asset, and also avoids having the asset become a part of a probate estate.
Finally, there are some assets that simply do not have co-owners. Prime examples would be IRA accounts or 401k plan accounts. These assets cannot be accessed by anyone other than the account owner (except in the case of certain divorce decrees), cannot be transferred during lifetime, and are transferred on death by way of beneficiary designations.
Forms of property ownership vary from state to state. For instance, a small number of states allow a “Transfer on Death” designation for real estate, but the majority do not.
Incorrect or inappropriate ownership designations can lead to difficult, expensive and unhappy situations – when in doubt, and when a substantial investment is involved, it’s best to check with an attorney on the correct form of ownership.