How You Title Assets

The name on a deed or account decides three things most owners never think about: whose creditors can reach the asset, who gets it when an owner dies, and how much capital gains tax the heirs will owe if they sell. Two couples with identical savings can end up with very different results because one chose "joint with right of survivorship" at the bank and the other did not. This chapter walks through the main forms of ownership, what each does well, and the mistakes that cost families the most. Property law is state law, so check which forms your state allows.

The main forms of ownership

Sole ownership. One person owns the asset. It is simple and fully controlled, but the asset is exposed to that person's creditors and, at death, passes under their will through probate unless a beneficiary or transfer-on-death designation is added.

Joint tenancy with right of survivorship. Two or more people own the whole asset together. When one dies, the survivors own it automatically, outside probate. It is the default for many joint bank accounts and for many married couples' homes. The trade-offs: each owner's creditors can usually reach that owner's share, the survivor takes everything regardless of what the deceased owner's will says, and adding someone other than a spouse can be a gift for tax purposes.

Tenancy in common. Each owner holds a separate share, which can be unequal, such as 70% and 30%. There is no survivorship: a deceased owner's share passes under their will or by intestacy. It suits unmarried co-owners, business partners and second marriages where each spouse wants their share to go to their own children. A creditor of one owner can reach only that owner's share, and forcing a sale requires a court partition action.

Tenancy by the entirety. A form of joint ownership available only to married couples, recognised in roughly half the states, some only for real estate. The law treats the couple as a single owner, so a creditor of just one spouse generally cannot reach the property. A debt owed by both spouses, such as a joint loan or a joint tax bill, can still reach it. Protection ends at divorce, and when the first spouse dies the survivor owns the property alone, and it is then exposed to the survivor's creditors. Federal tax liens can reach a spouse's interest despite the form, as the Supreme Court held in United States v. Craft (2002).

Community property. Nine states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) treat most property acquired during marriage as owned half by each spouse, whatever the title says. A few other states let couples opt in through a community property trust or agreement. Creditor rules in community property states are complex: a debt incurred by one spouse can often reach community property.

Titling decides who inherits

How an asset is titled can override your will. A will controls only property in your name alone with no beneficiary. Jointly owned property with survivorship goes to the surviving owner. Accounts with a beneficiary designation go to the named beneficiary, which is the subject of chapter 4. That makes titling a common source of unintended results:

• A parent adds one adult child to a bank account "for convenience" to pay bills. At the parent's death, that child owns the account outright, even if the will splits everything equally among all the children.
• A couple in a second marriage owns the house as joint tenants. The first spouse to die cannot leave their share to their own children; the survivor owns it all.
• A house is left in the name of a spouse who died years ago, and the survivor needs a probate proceeding to sell it.

Many states now allow a transfer-on-death deed for real estate, and every state allows payable-on-death and transfer-on-death designations for bank and brokerage accounts. These pass an asset outside probate while you keep full ownership during your life. A revocable living trust does the same for any asset retitled into it. Neither protects the asset from your own creditors while you are alive, because you keep full control.

The tax rule that titling changes: step-up in basis

When you inherit most assets outside retirement accounts, your tax cost (basis) becomes the asset's value on the date of death, under section 1014 of the tax code. The gain built up during the owner's life is never taxed. How the asset was titled decides how much of it gets this reset.

For a married couple in a common-law state who hold an asset as joint tenants, only the deceased spouse's half is included in their estate, so only that half steps up. In a community property state, both halves of community property step up at the first death. The example below follows a jointly owned brokerage portfolio bought years ago.

The portfolio cost $300,000 and is worth about $1,287,561 when the first spouse dies, an unrealised gain of $987,561.

• Held as community property, the whole gain of $987,561 is wiped out for tax purposes. The survivor could sell the next day and owe little or no capital gains tax.
• Held as joint tenants in a common-law state, only the deceased spouse's half steps up. The gain of $493,781 on that half disappears, but the survivor's own half keeps its original basis and still carries a gain of $493,781, taxable when sold.

Gifts work differently. If a parent adds a child to the title of an appreciated asset during life, or gives it outright, the child keeps the parent's original basis on the gifted part. Retitling a house or portfolio to a child to "avoid probate" can therefore trade a modest probate cost for a large capital gains bill later. A transfer-on-death deed or designation avoids probate and keeps the step-up.

Retirement accounts are the exception: traditional 401(k) and IRA money never gets a step-up, because the income tax on it has not yet been paid.

Choosing a form: the trade-offs

No single form is best. The choice depends on what you are protecting against: