Four common titling pitfalls

Titling of assets is a frequently overlooked and misused step in a comprehensive wealth plan. Titling mishaps, besides leaving you vulnerable to overzealous creditors and litigants during your lifetime, can undermine your wealth transfer goals. Indeed, many sophisticated estate plans have been derailed by the improper titling of assets.

It’s always important to review the titling of assets to insure the appropriate titling is being used to achieve your goals and the level of protection you require. There are four common pitfalls related to titling:

1 Excessive Vulnerability to Creditors and Litigants 

You received a bonus and purchased rental property. You titled the rental property in your individual name, just like your home. A guest fell on the property and the claim exceeds your insurance, putting the rental and your home at risk of judgment and collection. Have you reviewed the titles of your property in light of their vulnerability to creditors and lawsuits? In order to protect your assets, you should consider the following:

• Meet with your attorney to discuss how to use titling to protect your assets against overzealous creditors and litigants (you may be surprised by how exposed you are)
• Work with your trusted wealth manager to validate your titles conform to plan; ask them to advise you about how to use retirement accounts, annuities, insurance and mortgages to protect your assets
• Consider other ways to protect your assets, including business entities, homestead exemptions, trusts and gifting.

2 Lack of Consistency with Estate Plan

You’ve decided to add your daughter as a joint owner on your certificate of deposit (CD) to better help you manage rollovers online. Even though you have two other sons, you figure once you’ve passed she will just share the CD with them. The titling of your CD isn’t consistent with your existing estate plan to give equally to your three children. The distribution of your wealth according to your wishes depends on your titles and plan documents being in sync with one another. Joint ownership of the CD means your assets could be distributed according to someone else’s wishes, perhaps even a court’s. Validate your titles regularly by doing the following:

• Meet regularly with your wealth management team to prevent misalignment on goals or gaps between plan and execution
• Don’t rely on your heirs to intuitively complete your unwritten estate plan

3 Failure to Adapt to Changing Circumstances

You own a cupcake shop. In the past year, you got remarried. Since this is a second marriage for you, you’d like to keep the assets you owned before the marriage separate. Moreover, you discovered after the wedding your new spouse has some credit issues. Is your store still titled in accordance with your asset protection needs and legacy goals? As circumstances— personal, familial, financial, legal and tax—change, you need to revisit the titling of your assets or risk having your assets depleted by adversarial persons or unnecessary taxes. As you work to adapt your plan accordingly:

• Work only with a trusted wealth manager, attorney and CPA who are proactively staying on top of the changes in your life and in their respective zones of expertise, and who are willing to work together collaboratively with the big picture in mind
• Regularly review your titles to make sure they reflect current circumstances and avoid pitfalls

4 Possible Tax and Credit Ramifications

You decided to put your son on the title to your home with the intent of protecting yourself. You trust him implicitly; plus, your daughter lives out of state. This is an inexpensive solution and allows your son to help you manage the home. What could go wrong?

• Your home could be exposed to your son’s creditors
• Any property decision you make (sale, refinance and equity line of credit) will require the consent and signature of your son
  
• Adding your son may affect the title insurance or mortgage provisions of the lender
• Your son’s spouse may also become involved in the process
• Adding your son on the title may be considered a gift of half of the property’s value (potential gift tax consequences)
  
• If you sell the home you’ll share the capital gain exemption with your son, which may create conflict with your daughter

It’s important to know the tax ramifications of the titles you are using. You should:

• Consult with a financial planner or attorney who is licensed in your state and is well-versed in asset protection and estate planning (note: these are two distinct specialties)
• Ask your CPA to validate the anticipated tax ramifications of the planner or attorney’s recommendations
• Work with your trusted wealth manager to implement and monitor your strategy