Skip to Content
Investing Specialists

The Error-Proof Portfolio: Give Asset Titling Due Care

Not doing so can have unintended consequences.

If you haven't given much consideration to how your assets are titled, you're not alone. Most people own assets on an individual basis when they're single, then switch to joint tenancy with rights of survivorship, or JTWROS, for assets they own during their married lives.

In some cases, that simple approach to titling assets may be just fine. But improper titling--or failing to change asset titles when your life situation changes--can lead to unintended consequences. For one thing, the way your assets are titled will trump anything that's in your will. So if you pass away and you've titled your assets in a way that doesn't reflect your current situation and true wishes, the work you've put into estate planning may be for naught.

True, most capable estate-planning attorneys will emphasize the importance of correctly titling assets and naming beneficiaries. Because your estate-planning attorney isn't looking over your shoulder every time you open an account and designate a beneficiary, however, it's common for asset titling and beneficiary designations to run counter to other parts of a person's estate plan, including carefully constructed wills and trusts. Improperly titling assets can also leave your assets vulnerable in the case of lawsuits, divorce, or problems with creditors.

For example, say an elderly widowed parent found herself needing more and more assistance with bill-paying. To help simplify her home finances and allow her son to write checks on her behalf, she makes him a co-owner of her bank account. That sounds innocuous enough, but the unintentional side effect of that action is that when she passes away, that son will be the sole owner of those assets, even if his mother's ultimate goal was to have all of her assets divided equally between her son and daughter. If the son knows of and adheres to his mother's wishes, no harm done. But the son has the legal right to keep those assets for himself; those assets could also be in jeopardy if the son is sued, has creditor problems, or becomes divorced.

To help avoid pitfalls like that one, it's worthwhile to understand the key forms of asset ownership and titling. Proper titling also goes hand in hand with naming beneficiaries; this article discusses beneficiary designations in detail.

Individual Ownership
Individual ownership means that a single individual has complete control over an asset. That simplicity is attractive. But unless the individual's will specifies who should inherit the property or the individual has named a beneficiary for the asset, individually owned assets must pass through probate, often a costly and time-consuming process, The financial institution where you hold your assets may provide you with a beneficiary-designation form, or you may use a mechanism like transfer on death or payable on death registrations to specify the person who should inherit an asset. (Registering accounts as TOD or POD is typically pretty straightforward and free; TOD is for securities accounts, whereas POD is for bank accounts.) Such mechanisms ensure that an asset passes directly to its intended recipient.

Joint Titling
There are a few different ways to own assets jointly. The most common is joint tenancy with right of survivorship. That means that each of the owners own equal percentages of an asset, and at the time of one individual's death, that person's share of the asset automatically passes to the surviving owner or owners. A key downside of this form of ownership, as in the mother and son example above, is that the property owned as JTWROS may be vulnerable if one of the owners is sued or is subject to claims by creditors. Tenancy in the entirety is quite similar to JTWROS, but this form of ownership is available only to married couples and also offers protection from a spouse's creditors or in case of lawsuits.

Tenancy in common is another way for two or more individuals to own property together; they needn't be married or related. A crucial distinction between tenancy in its entirety and JTWROS is that the ownership stakes may be unequal. This is a common form of ownership for two partners who are unmarried. In contrast with property held JTWROS, a partner's stake in property owned by tenants in common will not automatically pass to the remaining partner upon the first partner's death; rather, that individual's will would have to specify that the other partner is entitled to receive the asset.

Some states also have what are called community property laws for married couples. That means that regardless of how assets are titled, both spouses own half of all assets acquired during the marriage. Community property laws are in effect unless the spouses have a written agreement specifying an alternate ownership scheme.

Trust Arrangements
Individuals and couples can also hold assets inside a trust. You can put any type of asset inside a trust--cash, securities, or real estate. The specifics of trusts are too complicated to delve into here (and the permutations too many), but trusts may be used for tax-planning purposes and to protect assets from creditors and in case of lawsuits, among other factors. There are two key types of trusts--living trusts, meaning that the trust is established when a person is alive--and testamentary trusts, which go into effect upon a person's death, as put forth in that person's will.

Next Steps
Clearly, titling your assets to reflect your wishes and ensure the safety of your assets isn't always a simple matter. But the stakes of not doing so are high, especially if you have a high level of wealth, a complicated financial situation, or there's a risk that you'll be sued. A qualified estate-planning attorney can help ensure that you're following the right steps and thinking through all of the variables. If you already have an estate plan, it also pays to consult with your attorney as your circumstances change (there's a death or divorce in your family, for example) and as you acquire new assets and change financial-services providers. Doing so can help ensure that your titling syncs up with your carefully laid estate plan.

See More Articles by Christine Benz

Become a Morningstar Content Contributor Today!

Contributing content to Morningstar allows you to increase your firm's exposure to a premium audience of financial advisors and individual investors.

Please click here to learn more about the Morningstar Content Submission Platform.

For additional guidance in using the Content Submission Platform, please view this video.


New! 30-Minute Money Solutions
Need help picking up the pieces in this turbulent market? 30-Minute Money Solutions by Morningstar director of personal finance Christine Benz simplifies the daunting task of getting your financial house in order. Written for novice and experienced investors alike, this book offers manageable, step-by-step solutions for tackling money challenges and building a comprehensive financial plan in simple 30-minute increments. Learn more.
Order Your Copy Today--$16.95