Wills and TrustsWhen I write anything I agonize over the title. Does it match the general mood I really hope to express? In my case, a poor title might cost me a few readers. But titles can matter much more in certain company. One art critic I know insists on being called “Mrs. X” instead of her first name. Another acquaintance, with a PhD in Philosophy, prefers to be called “Doctor Y” (and rightly so… he earned it!). If you want to work with either of these people, you need to use the appropriate title.

Why do I bring this up? It’s the same with your financial accounts. Having the wrong title associated with your money may mean unnecessary taxes or funds not ending up distributed as you wish.

Deciding How To Hold Money

Everyone worries about having enough money… that’s still the most important question. But maybe the second most important question is, “how should you hold your money?” Making sure it is available when you need it and in the most tax-efficient way possible can save you cash AND headaches… and it’s all controlled by the title.

Here are some of the decisions you’ll face. 

Decision #1: Am I Sharing This Money Now Or Later?

Titling your account with another person, called “joint titling,” is a problem and solution… it just depends on what you’re looking to achieve. If you’re married or sharing an account with someone, a joint account is the perfect arrangement. You can both access funds freely. The bad news is that this also is a problem if you’re sharing it with the wrong person. For example, many people create a joint account with a child to avoid probate court. Their goal is to ensure that their child has access to the funds without any estate planning, the moment mom or dad passes away. This can end up messy in a bunch of different ways. A better solution is to write a will or add a beneficiary form to your account. Your bank can show you how to do this.

Decision #2: Can I tax shelter this money?

There are a variety of tax shelter options available. Generally, if you’re going to need money in the short term, tax shelters aren’t worth the trouble. However, if you know you won’t need money until retirement date, you probably have several options. In the United States, IRAs and Roth IRAs are two tax shelter types you’ll want to explore. In Canada, a Registered Retirement Savings Plan (RSSP) and a Tax Free Savings Account are important options that are similar to IRAs and Roths in the USA.

Government sponsored tax shelters allow you to still choose whatever investment fits your needs. Often people will ask me what return an IRA will earn. It depends on what you put inside of it. Think of a government tax shelter as the wrapper around an investment. You can change investments inside the wrapper, but if you take money out you’d better follow government rules! The government tax shelter is only the title, not the actual object into which you’re investing.

Some people will use an investment called an annuity to help defer taxes. While this can sometimes be a good option, annuities often have additional rules to access your money. Ask the annuity provider for a list of their rules and fees before you sign an annuity agreement.

Decision #3: Who gets this money if I cant use it?

I mentioned this briefly earlier, but let’s explore estate issues in detail. If you open an account and don’t specify who will get the money if you can’t use it before you die, then your estate plan (a will or trust) will dictate where the account will go. Because of this, we want to make sure and have the right title.

If I want a spouse to have my money when I die

Ask to open a joint account, except for cases when you to don’t want your spouse to have access to your funds until after you die. In that case, you’ll want a transfer on death agreement.

If I want a child or organization to have my money

Ask for a form that will allow you to name beneficiaries in your account. Depending on the type of account you’re opening, it might be called a beneficiary form or a transfer on death agreement. In this document, if you have people you want to have your money, decide whether you want your estate plan to control where the money goes or if you want the actual account to control where your money goes.

In nearly every case, if you name a beneficiary and not a will or trust in your document, your money will flow directly to the beneficiary and NOT through your estate plan. People are often confused by this and think that if they have a will, everything will happen as they state in the will. But money in any accounts, including 401k plans and IRAs, where you name beneficiaries will move according to those documents rather than the will.

A Big Mistake

I mentioned earlier that people often jointly title assets with kids or friends to avoid estate plans. On the surface, this makes things really easy; you pass away and immediately that child or friend can use your money. However, It’s really easy to find flaws in this plan.

Maybe your child or friend is trustworthy, but if they’re married to an untrustworthy individual, you’re giving easy access to your money (while you’re still alive!) to others. Also, if your child or friend has trouble with their spouse and they go through a divorce, half of your assets could potentially be subject to that divorce. Also, if the person becomes party to a lawsuit, your assets might be part of that suit if they’re jointly held.

What To Do Next: Your Homework

Lots of the issues with titles revolve around estate planning. First, check out the laws in your state to see what’s advisable. Because rules are different depending on where you live, achieving the perfect title might involve working with a local attorney to set up your estate plan. Finally, don’t forget accounts you have at a job! I can’t tell you the number of  horror stories I’ve heard about people who forget to change the title on 401k plans or life insurance through work after they go through a divorce or have a big life event. You don’t want to make that mistake! It could be far more costly than forgetting to call the professor “doctor.”