Despite the glamorous mystique about flashy real estate deals and anonymous trust accounts in foreign asset protection havens, the real world of real estate and asset titles is about as sexy as Ben Franklin’s britches. Real property is a topic that has caused many an enterprising law student to lapse into a comatose state and awaken in a puddle of desk drool to the pleasant sound of an irate professor. Enough said…
For this reason, few people really say much about the concept of how to title your assets, and those in the know don’t write about it all that often. However, titling your assets properly is a key factor in a well organized and thoughtful estate plan.
A simple definition of “assets” refers to anything that you own that has value and a “title” means to identify the person or legal entity who owns the asset.
Of course, assets such as guns, stamps, coins and other “personal property” do not really have a “title” per se. Personal property assets are generally transferred with a simple receipt or bill of sale and possession itself tends to equate with ownership.
Today we’re focusing on those assets that require a kind of “certification” by a legal document…which is a piece of paper with the legal formalities needed to convey all of the rights and obligations of ownership.
Real property is generally titled (held and conveyed) by a piece of paper known as a deed and there are various types of deeds depending upon the level of “warranty protection” that the deed provides.
Ownership of a cash value life insurance policy is titled (similarly held and conveyed) by a piece of paper that functions much like a deed but is called a “policy”.
Interestingly, both a deed and a policy are basically contracts because they specify the nature and extent of your ownership rights and the piece of paper itself is an enforceable legal document. These contracts can also specify the title owner in different ways depending upon your estate planning goals.
This article will focus on titling options for these 2 categories of assets as well as the similarities and distinctions of each.
Real Estate and Cash Value Life Insurance
A Comparison Can Be Drawn Between the Assets of Real Estate and Cash Value Life Insurance Because, In Some Key Ways, They Are Similar Investments, and Who Holds The Title to These Assets, Both During Your Life and Upon Your Death, Will Impact Your Overall Estate Plan.
In the world of real estate, a few major asset title questions that arise:
- Is the real property owned individually or jointly between more than 1 person?
- Is the real property owned by a person or set of persons (individually) or is it owned by another legal entity?
- If the real property is owned by more than 1 person, what happens if one of the owners dies?
Real property ownership can be simple or complicated depending upon the terms of the deal and circumstances involved. For most people, purchasing a home is their single largest real estate investment and the titling is usually straightforward. Further, for business owners seeking asset protection, it can get more complicated.
Married couples usually purchase a family home jointly, as husband and wife, with a right of survivorship. This titling strategy is by default and means that if one spouse were to die, the surviving spouse would take title automatically as a transfer upon death, by right of survivorship.
In some states, a tenancy by the entirety refers to assets held jointly between a husband and wife with a right of survivorship. In other states, namely community property states, assets acquired by spouses with a right of survivorship are also titled as community property.
Unmarried people who acquire a home, usually just title the real property in their individual name. For unmarried couples or other groups of individuals who acquire real property jointly, there are basically two ways to do it without using a trust or other legal entity which are joint tenancy with a right of survivorship or a tenancy in common.
Joint tenancy with a right of survivorship provides a real property owner with a right of survivorship in the unfortunate event that the co-owner passes away. A tenancy in common, on the other hand, allows the co-owner to designate in a last will or trust where the other 1/2 of the real property will pass upon death.
A key distinction and benefit to a joint tenancy is that real property passes outside of probate, whereas a tenancy in common will require a probate for the deceased owners undivided half interest. So, there are different titling strategies depending upon whether the co-owners heirs or the other co-owner are intended to receive the real property upon a co-owner’s death as an automatic transfer upon death.
Using a Trust, Partnership, or LLC
Of course where asset protection strategies and a more sophisticated investment strategy is concerned, real property can also be owned in a trust, a partnership, an LLC or other legal entity, and these are all common alternatives for real estate investment and development groups. The key to holding real estate in any of these “non-individual” entities is to specify in the governing documents what will happen to an owner’s interest in the event they pass away. Do the other owners get their share or is there a buy out in some form? Does the interest pass to the deceased owner’s estate.
These can become complicated matters and can overlap with business succession planning and thus insurance and utilization of a buy-sell agreement may offer a real benefit to all parties concerned.
Cash value whole life insurance asset titling questions that arise are:
- Who owns the policy -or- who is paying the premium…this may or may not be the “insured”?
- Who is the beneficiary of the policy upon the death of the policy owner?
- Is the beneficiary an individual or is there more than 1 person?
Life insurance is an asset. And in the same way that you might purchase a parcel of real estate as an equity growing investment, you can purchase a whole life insurance policy for the same reason. Generally, the title owner of the policy is an individual but it could can also be a trust or business entity such as a corporation or an limited liability company if the circumstances warrant this strategy. Unlike real estate, generally there is only one owner and this may or may not be the insured. The insurer is of course the company that is providing the life insurance coverage and the insured is the person whose death causes the insurer to pay the death benefit to the designated beneficiaries.
The beneficiary of the policy can be a person, trust, estate or business and may be single or multiple parties. Other than deciding who owns the policy and who the insured is, they key asset titling question for cash value life insurance (in the estate planning context) is how the beneficiaries are titled. This is a major part of your estate plan that can easily be overlooked.
For example, if you’ve created a family living trust as part of your estate plan, you need to decide if it should be the designated beneficiary of your cash value life insurance policy. If you designated your family living trust as such, the death benefit of your cash value life insurance policy will flow into the trust and your successor trustee will have the obligation to manage it and utilize the tools provided in your living trust for the maximum benefit of your estate and your beneficiaries. If an estate is larger and therefore vulnerable to federal or state estate tax exposure, an irrevocable trust may be used to provide liquidity for the estate without being subject to estate taxes by owning the policy and being designated as the beneficiary upon the death of the insured.
Similarly, a business entity such as a corporation or an limited liability company may be the designated beneficiary if a business is purchasing life insurance on a business partner’s life as part of an entity purchase buy-sell strategy. A key person insurance policy designed to insure the company against the loss of a valuable employee is another situation where a business entity may be the designated beneficiary of the life insurance policy.
There may also be situations where an individual beneficiary is preferred to a trust or other entity. For example, it may be beneficial to designate one or more adult children as beneficiaries in order to keep the death benefit from becoming subject to federal estate taxes by virtue of becoming part of the estate. In simpler estate plans where there is no federal estate tax issue, it may just be easier to designate your spouse as a primary beneficiary and perhaps your trust or adult children as a contingent beneficiary.
As helpful side note, with any strategy intended to use an alternative beneficiary in order to limit estate tax liability while providing liquidity to the estate, you can encourage that beneficiary to use the money for the estate through loans or purchasing assets; however, this cannot be a requirement or it won’t pass IRS scutiny.
Another good practice tip is that you should avoid designating your “estate” as the beneficiary of any life insurance policy because this vague designation will require that the proceeds must go through probate, and this costly and time consuming court process should be avoided whenever possible. As mentioned above, proceeds going directly to the estate are also subject to federal estate taxes.
An underlying theme in this article thus far is about planning for automatic transfers upon death in a way that makes sense and furthers your overall estate plan. And this applies to both real estate AND cash value life insurance assets.
Transfer Upon Death Deed
An automatic transfer upon death is about avoiding the probate process AND making sure that the proper beneficiaries receive these assets with minimal cost or complications.
Many states have adopted a transfer upon death deed that allows real estate title to pass directly to a beneficiary without the need for probate. This approach is analgous to life insurance because it operates in the same way as a beneficiary designation on a policy. A couple of other transfer on death strategies that have not been discussed as of yet relate to other kinds of assets like cash accounts and non-qualified investment accounts and corporate or LLC shares in a closely held businesses.
Non-qualified accounts may be titled directly into a family living trust OR may add a “pay on death” (POD) designation so that the account will pass directly to a beneficiary without the need for probate. Similarly, a “transfer on death” (TOD) provision can be placed in a corporate shareholders agreement or LLC operating agreement in order to direct corporate officers to automatically transfer shares to a beneficiary upon the death or permanent disability of a key business partner or employee owner. Using TOD designations, backed up by a solid buy-sell agreement and life insurance coverage is a critical part of family business succession planning.
The above concepts really are the fundamentals and a good starting point to managing your asset titling concerns. There are other assets not discussed today such as IRA and 401(k) plans; however, they operate under the same principles as cash value life insurance, in that they require some thoughtful planning concerning the beneficiary designations of these accounts.
Of course, all of this is part of your free strategy session.