By Jason R. Miller, CFP®, BMO Private Bank

Proper Asset Titling:A Critical Component of Your Estate Plan

F I N A N C I A L P L A N N I N G U P D A T E

BMO PRIVATE BANK www.bmoprivatebank.com

Asset Titling and Estate Planning An often overlooked aspect of financial planning, and estate planning in particular, is the effect of titling assets. The term titling refers to the legal form of asset ownership. Forms of ownership are governed by state law, can vary greatly and have wide-ranging implications, including potentially unfavorable estate planning ramifications. It is important to review the ownership structure of your assets to ensure that they are in sync with your current and future financial goals.

From an estate planning perspective, there are typically three main objectives when considering proper asset titling: avoiding probate, estate tax minimization and control over the disbursement of one’s assets. Let’s take a closer look at asset titling and its impact on probate avoidance, and then examine how properly structured trusts can potentially help meet all three objectives.

Avoiding ProbateOne of the main considerations in reviewing one’s asset titling is to ensure, to the extent possible, avoidance of state probate. Probate is the process that an individual state will use to settle the estate of a deceased person (decedent). The main objections that people have with the probate process are that it may violate family privacy (as the proceedings are made a matter of public record) and may be unnecessarily costly and time consuming, resulting in a delay to beneficiaries in receiving their distributive shares. For these reasons, and to simplify the estate settlement process for their heirs, many people prefer to structure ownership of their assets in such a way as to avoid probate. Keep in mind that it is possible to have probate proceedings in more than one state (referred to as ancillary probate in states outside the decedent’s place of residence) depending on the physical location (situs) of one’s assets.

A commonly held misconception is that having a valid will exempts an estate from state probate. While a will is a useful tool for many reasons, the state determines a will’s validity and whether it is open to contest by family or others. For this reason, ownership types (commonly referred to as will substitutes) which allow property to pass by operation of law outside the probate process are often used to ensure that assets are passed according to the decedent’s wishes and in the most efficient manner possible.

The table on the next page shows various forms of asset ownership and respective estate planning implications.

Ownership interests in business entities, including Limited Liability Companies (LLC), Limited Partnerships (LP), Subchapter S Corporations (S-Corp) and Subchapter C Corporations (C-Corp) may also be subject to the probate process depending on who or what holds the ownership interest. For instance, being an individual member of an LLC may provide creditor protection, but the ownership interest is still subject to the probate process. If, however, a revocable trust was the member of the LLC instead of the individual, this problem would be resolved as the ownership interest would pass according to the provisions of the trust outside of the probate process.

“ If, however, a revocable trust was the member of the LLC instead of the individual, this problem would be resolved as the ownership interest would pass according to the provisions of the trust outside of the probate process.”

FORMS OF PROPERTY OWNERSHIP*

DESCRIPTION OWNERSHIP INTEREST SUBJECT TO PROBATE

INCLUSION IN DECEDENT’S ESTATE

STEP-UP IN BASIS

Individual Name Property held in one person’s individual name Yes, at individual’s death

Full value Full

Community Property

Property held by spouses in community property states giving each an undivided interest in the whole

Yes, at first death One-half of value Full

Community Property with Right of Survivorship

Property held by spouses in certain community property states allowing the surviving spouse to receive the asset by operation of law outside the probate process

Not at first death

Yes, at death of the surviving spouse

One-half of value Full

Joint Tenancy with Right of Survivorship

Property owned equally by two or more individuals allowing the surviving tenants to receive the asset by operation of law outside the probate process

Not until death of the last living tenant

Depends upon the contribution by the tenant – may be full value if the tenant contributed all of the property; may be one-half value if joint between husband and wife

Depends upon the contribution

Tenancy by the Entirety

Property held in certain states by spouses in which neither has power to dispose of property without the consent of the other – the surviving spouse receives the asset by operation of law outside the probate process

Not at first death

Yes, at death of the surviving spouse

One-half One-half

Tenancy in Common

Property held by one or more persons giving them undivided percentage interests in the whole

Yes, at each death

Depends upon the ownership percentage

Full value of the ownership percentage

* Property ownership laws are state specific; individuals should consult with their tax and legal professionals regarding their situation.

Retirement accounts such as IRAs, 401(k)s, pension plans and the like have named beneficiaries to whom the assets will pass directly outside of the probate process. The same holds true for life insurance and annuity contracts. It is important to remember that specific beneficiary designations, whether through POD, TOD, beneficiary deed, retirement plan or insurance contract, will trump any provisions set forth in a will or trust. For this reason, it is important that the account and/or policy owners review their listed beneficiary designations to ensure that the assets will pass according to their wishes.

As shown in the above chart, the amount of property included in the decedent’s estate (and thus potentially subject to estate taxes) is determined by the titling of that property or by the laws of community property. At the

decedent’s death, part or all of the property is eligible for a step-up in cost basis to the fair market value on the date of death (or alternate valuation date if applicable). Certain forms of titling provide for a step-up in cost basis for only half of the property and thus should be carefully considered. This point is illustrated in the differences between community property with right of survivorship versus joint tenancy with right of survivorship (in a non-community property state). With community property, only one-half of the property is included in the decedent’s estate, while the entire value of the property receives a step-up in cost basis. With joint tenancy with right of survivorship, if only half of the value of the property is included in the decedent’s estate, only one-half of the property receives a step-up in basis.

The following are currently community property states:

Even for those forms of ownership that pass by operation of law to the surviving spouse, the property becomes subject to probate upon the death of the surviving spouse without appropriate planning. In most states, one option is to have payable on death (POD) designation naming a specific beneficiary added to bank accounts and transfer on death (TOD) designations added to securities accounts. While currently allowed by fewer states, filing a beneficiary deed may accomplish this same end for real estate. With these designations listed, the assets will pass immediately to the named beneficiaries. While certainly not the only option and not effective or optimal in every situation, it is important to be aware of these strategies as they may have a place in an estate plan.

The following allow beneficiary deeds for real estate:

While not the focus of this discussion, tenancy by the entirety may provide asset protection benefits in certain states as one spouse cannot dispose of the property without the consent of

the other. In addition, some community property states, like Wisconsin and Washington, permit disposition of property by community/marital property agreement.

The following currently allow tenancy by the entirety:

Using Trusts to Avoid Probate, Minimize Estate Taxes and Control Disbursement of AssetsPerhaps the most common and effective way to avoid probate, minimize estate taxes and control asset disbursement is through the use of trusts. Trusts are legal documents that govern the management and disposition of the trust assets.

While a detailed description of the multitude of possible trust planning techniques is not possible here, a few brief examples will illustrate how planning with trusts can minimize the estate tax burden and provide greater control over the disbursements of assets.

One way in which trusts can be used to minimize estate tax and provide greater control over the disbursements is by ensuring that the decedent’s applicable exclusion amount ($5,250,000 in 2013) is separated from the estate of the surviving spouse for asset protection purposes and so that any future growth on the assets remains outside of

Community Property States Allow Community Property with Right of Survivorship

Arizona Yes

California Yes

Idaho Yes

Louisiana No

Nevada Yes

New Mexico Yes

Texas No

Washington Yes

Wisconsin** Yes

Alaska Missouri

Arkansas New Jersey

Delaware Oklahoma

District of Columbia Pennsylvania

Florida Rhode Island

Hawaii Tennessee

Maryland Vermont

Massachusetts Virginia

Mississippi Wyoming

States Allowing Beneficiary Deeds

Arizona Montana

Arkansas Nevada

Colorado New Mexico

Hawaii North Dakota

Illinois Ohio

Indiana Oklahoma

Kansas Oregon

Minnesota Wisconsin

Missouri

**In Wisconsin, community property is termed “marital property.”

States that Allow Tenancy by the Entirety

Illinois New York

Indiana North Carolina

Kentucky Oregon

Michigan

States that Allow Tenancy by the Entirety for Real Estate Only

Feel Confident About Your FutureBMO Private Bank – its professionals, its disciplined approach, its comprehensive and innovative advisory platform – can provide financial peace of mind.

For greater confidence in your future, call your BMO Private Bank Advisor today.

www.bmoprivatebank.com

United States Department of Treasury Regulation Circular 230 requires that we notify you that this information is not intended to be tax or legal advice. This information cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer. This information is being used to support the promotion or marketing of the planning strategies discussed herein. BMO Harris Bank N.A. and its affiliates do not provide legal or tax advice to clients. You should review your particular circumstances with your independent legal and tax advisors.

Jason Miller is a Financial Planner with BMO Private Bank. Jason specializes in providing customized financial planning solutions to individuals and families as part of an overall wealth management strategy. He joined the organization

in 2010 and has over eight years of experience in financial services.

Jason earned his BS in Finance from Arizona State University and his MBA from Brigham Young University. He is a CERTIFIED FINANCIAL PLANNER™ practitioner. Jason is a member of the East Valley Estate Planning Council, the Arizona Management Society, and the Financial Planning Association of Greater Phoenix, where he also serves on its Board of Directors.

BMO Private Bank is a brand name used in the United States by BMO Harris Bank N.A. Member FDIC. Not all products and services are available in every state and/or location. Estate planning requires legal assistance which BMO Harris Bank N.A. and its affiliates do not provide. Please consult with your legal advisor. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and CFP® in the U.S.

the estate of the surviving spouse and therefore free from future estate taxes. This is typically referred to as a credit shelter trust.

Another example is the so-called QTIP trust. A QTIP trust provision allows property to qualify for the unlimited estate tax marital deduction, while attempting to preserve the trust assets for future beneficiaries (such as children from a prior marriage). This type of trust provides the surviving spouse mandatory distributions of income and possible distributions of principal of the trust, but not necessarily access to all trust assets. If the same property were left outright to the surviving spouse (such as through right of survivorship), these types of restrictions on the use of the property would not be possible and the remaining beneficiaries (children from a prior marriage in this example) may be left without any assets.

While planning with trusts can be incredibly effective in the accomplishment of various goals, it is important to remember that the trust document only governs assets actually titled in the name of the trust. All too often, well-intentioned individuals will work with their attorneys to establish trust documents and then fail to follow through with fully “funding” the trust. The best trust document in the world does no good if a person forgets to title all of the appropriate assets in the name of the trust.

ConclusionWith multiple assets and various forms of potential ownership, it is easy to lose track of asset titling and perhaps not be aware of the estate planning implications of the titling currently in place. Yet, it is imperative that any estate plan review include a comprehensive examination, with your financial planner and legal and tax advisors, of all assets and asset titles to ensure that such ownership titling is consistent with your short- and long-term estate planning objectives.