TOD, JTWROS – what do these acronyms signify?
They are shorthand for transfer on death and joint tenancy with right of survivorship – two designations that permit automatic transfer of assets from a deceased individual to a surviving individual.1
This automatic transfer of assets reflects a legal tenet called the right of survivorship – the idea that the surviving partner should be the default beneficiary of the account. In some states, a TOD or JTWROS beneficiary designation is even allowed for real property.2 When an account or asset has a TOD or JTWROS designation, the right of survivorship precedes any beneficiary designations made in a will or trust.3
There are advantages and disadvantages to having TOD and JTWROS accounts.
TOD & JTWROS accounts usually avoid probate. As TOD and JTWROS beneficiary designations define a direct route for account transfer, there is rarely any need for such assets to be probated. The involved financial institution has a contractual requirement (per the TOD or JTWROS designation) to pay the balance of the account funds to the surviving individual.4 In unusual instances, an exception may apply: if the deceased account owner has outlived the designated TOD beneficiary or beneficiaries, the account may face probate.5
To be technically clear, transfer on death signifies a route of asset transfer, while joint tenancy with right of survivorship signifies a form of asset ownership. In a variation on JTWROS called tenants by entirety, both persons are legally deemed as equal owners of the asset or account while living, with the asset or account eventually transferring to the longer-living owner.4
Does a TOD or JTWROS designation remove an account from your taxable estate?
No. A TOD or JTWROS designation makes those assets non-probate assets, and that may save the estate executor a little money and time – but it doesn’t take them out of the gross taxable estate.
In fact, 100% of the value of an account with a TOD beneficiary designation will be included in the taxable estate. It varies for accounts titled as JTWROS. For example, if you hold the title to a JTWROS account with your spouse, 50% of its value will be included in your taxable estate. If it is titled as JTWROS with someone besides your spouse, the entire value of the account may go into your taxable estate, unless the other owner has made contributions to the account.6
How about capital gains?
JTWROS accounts in common law states typically receive a 50% step-up in basis upon the death of one owner. In community property states, the step-up is 100%.6
Could gift tax become a concern?
Yes, if the other owner of a JTWROS account is not your spouse. If you change the title on an account to permit JTWROS, you are giving away a percentage of your assets; the non-spouse receives a gift from you. If the amount of the gift exceeds the annual gift tax exclusion, you will need to file a gift tax return for that year. If you retitle the account in the future, so that you are again the sole owner, that constitutes a gift to you on behalf of the former co-owner. They will need to file a gift tax return if the amount of the gift tops the annual exclusion.6
TOD or JTWROS accounts are not cheap substitutes for wills or trusts. If you have multiple children and name only one of them as the TOD beneficiary of an account, that child will get the entire account balance and the other kids will get nothing.6
As you create your estate, respect the power of TOD & JTWROS designations.
Since they override any beneficiary designations made in wills and trusts, you want to double-check any will and trust(s) you have, to make sure that you aren’t sending conflicting messages to your heirs.6
TOD & JTWROS designations can represent a convenient way to arrange the smooth, orderly transfer of account balances when original account owners pass away.
Andrea L. Blackwelder, CFP®, ChFC, CDFA® and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with the Denver Financial Advisors at Wisdom Wealth Strategies.
“Wisdom Wealth Strategies, LLC is a registered investment advisor offering advisory services in the states of Colorado and California, and in other jurisdictions where exempted.” This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates.
Citations.
1 – finra.org/industry/terms-and-acronyms [9/26/18]
2 – investopedia.com/terms/j/jtwros.asp [12/20/18]
3 – thebalance.com/why-beneficiary-designations-override-your-will-2388824 [12/19/18]
4 – washingtonpost.com/business/2018/11/12/transfer-death-deed-may-be-good-instrument-leaving-your-home-your-child-beware-flaws/?noredirect=on&utm_term=.3162fd5503c9 [11/12/18]
5 – thebalance.com/what-is-a-transfer-on-death-or-tod-account-3505253 [12/30/18]
6 – investopedia.com/articles/pf/08/joint-tenancy.asp [3/20/18]