4 Considerations When Titling Assets

Wills and trusts are often viewed as the pillars of any good estate plan, but asset titling—or the way you own an asset (individually, jointly, etc.)—is just as critical.

"As with a trust, most titled assets aren't subject to probate, the legal process of validating your will and distributing your assets," says Austin Jarvis, director of estate, trust, and high-net-worth tax at the Schwab Center for Financial Research. "Plus, changing a title is generally far less expensive than setting up a trust."

That said, estate owners should ensure all titling is consistent with their larger estate-planning goals. "Conflicting instructions or improper titling can create unintended consequences for your heirs," Austin cautions.

Here are four considerations to keep in mind when incorporating asset titling into your plan.

• Titling typically supersedes a will: "Say you stipulate in your will that your family's longtime vacation home be split among your children from a previous marriage," Austin says. "If the property is titled with your current spouse and includes rights of survivorship, that person would take full ownership of the property upon your death irrespective of the instructions in your will."
• Jointly titled assets transfer immediately: A trust or probate pays beneficiaries only after all expenses and taxes are paid, whereas jointly titled assets transfer to beneficiaries immediately. "This is a boon for heirs but can create liquidity issues when it comes to settling estate costs," Austin says. "If that's a concern, consider setting aside funds to cover such expenses."
• Beware jointly titling assets with an heir: Generally speaking, assets you own at death receive a step-up in cost basis, meaning any future gains are determined by the value on the date of death rather than the date of purchase. However, if you jointly title a property with an heir, only your portion—rather than the entire asset—receives the step-up in value, potentially exposing your heir to greater capital gains taxes should they eventually sell. "In this case, it's probably better to title the property in the name of a revocable trust and name a beneficiary so the entirety of the asset receives the step-up in basis," Austin says.
• Proper titling can help shield your spouse from capital gains taxes: If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, all community property with right of survivorship is eligible for a 100% step-up in cost basis when one spouse passes away. That means the entire cost basis of the asset—not just your half—resets to the value on the day of death, and any future gains will be determined using the new cost basis.

"Given varying state laws and the many considerations that go into proper titling, it's essential to work with a seasoned advisor or estate-planning attorney to help ensure your assets will transfer as intended and accomplish your estate goals," Austin says.