Non-Qualifying Investment Accounts: How To Navigate The Options

When thinking of non-qualified investment accounts, several things come to mind. What is the purpose of the account? What’s the best way to use them? What happens to the account when I die? Some of you may even be asking, “What is a non-qualified account?” Without understanding the various types of accounts, it can seem like you’re tangled in the weeds. Well, today’s topic will make choosing a non-qualified account much simpler. By the time you’re done reading this, you’ll be highly qualified to make non-qualifying investments or at least you’ll have a better understanding of them. So join me as we make non-qualifying investments financially simple!

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 Time Index for “Non-Qualifying Investments:

• 00:49 – Non-Qualifying Investment accounts
• 01:12 – What Does Non-Qualified Mean?
• 02:03 – Individual Accounts
• 02:42 – Joint Tenant With Right of Survivorship
• 06:34 – Community Property
• 07:12 – Tenants in Common
• 07:56 – Tenants By Entirety
• 10:33 – Convenience Account
• 12:02 – Payable on Death & Transfer on Death
• 13:17 – Custodial Account
• 14:22 – Estate Account
• 15:13 – Conservatorship Account
• 15:37 – Guardianship Account
• 15:57 – Wrap Up

Individual Non-Qualifying Investment Types

Before we begin discussing the various types of non-qualifying investment account types, let’s take a moment to explain what they are. To simplify the concept, a non-qualified account does not qualify for any level of tax preference treatment. There is no tax deduction or deferred tax treatment available to a non-qualifying investment, hence the name. The absolute most common non-qualified account is your bank account. However, there are many other non-qualifying investment types to consider.

The individual account is, far and away, the most popular type of non-qualified account. I remember when I took my kids to open up their first bank accounts. We went down to the bank and set up an account for each one of them, and my dear friend, Brice, walked them through the entire process. They were so excited to have their own accounts with their names on them, that they insisted on taking me out for pizza afterward. Just kidding about that last part but they were very excited and so was I. Anyway, let’s take a look at the various types of individual non-qualified accounts.

Joint Tenant With Right Of Survivorship

This is another very common account and is commonly referred to as a JTWROS account. While it’s very popular amongst married couples, it can be used by just about anyone. Basically, a JTWROS allows you to move assets to the person — or persons — with the right of survivorship when you pass away, without having to deal with estate issues. A joint tenant with right of survivorship will supersede your last will and testament. In other words, if you bequeath everything you own to your spouse but you have a JTWROS with a business partner, that business partner receives the assets associated with the business regardless of what is stated in your will.

One of the more common uses of the JTWROS is to disinherit somebody from an estate. So if dad passes away and leaves a fortune to mom, she can prevent that money from being inherited by one or more of her children by assigning a JTWROS designation to the children that she wants to receive the inheritance. When she passes away, the assets transfer to the children listed as joint tenants with rights of survivorship, thus, disinheriting the other child.

It is important to note that if the surviving tenant is not the spouse of the deceased tenant, the assets could be subject to an estate tax. Likewise, leaving your assets to a child with JTWROS could bring about completed gift issues resulting in further taxation. So simply assigning somebody as a joint tenant with right of survivorship, doesn’t necessarily free them from the burden of tax on the assets. This is why JTWROS is most commonly used by married couples.

Community Property Accounts

There are a few derivatives of the joint tenant with right of survivorship type of non-qualifying account. They have many of the same guidelines with, perhaps, a small tweak to the rules governing who can use them or how they can be used. A community property account is limited to only a handful of states — Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, and Wisconsin — and is similar to a JTWROS but it is only available to married couples. So, unlike the JWTROS, a parent cannot use a community property account with their child.

Tenants In Common

Similar to the JTWROS, the tenants in common or TIC account actually works in the opposite way. Where the JTWROS supersedes your last will and testament, the TIC is recommended when an account is shared and will be subject to a will. So the TIC basically ensures that the account passes under the will or the estate plan.

If my dear, sweet wife, Emily were to pass away — God forbid — and leave me with all of savings, I’m most likely going to place that money into a tenants in common account. Doing so guarantees that my children receive the money equally. I’m not trying to disinherit any of my children. So you can think of the TIC account as the reverse of a joint tenant with survivorship.

Tenants By Entirety

Now some states allow an account called tenants by the entirety. Depending on the state, tenants by the entirety may apply to real property, — property that is immovable, such as real estate — personal property, — property that is moveable and subject to ownership, such as a vehicle — or both.

What a tenants by the entirety account does is it allows two parties to hold a property or an account together. If either one of the parties wishes to change their interest in any way, the other party must agree to allow it to happen. So, my wife and I own a piece of real estate. If for some reason, I decided that I wanted to sell my half, Emily would have to agree to it before I could sell. In that situation, we agree by the entirety. Hence, the name, tenants by the entirety.

However, when one of us passes away, the full ownership of the property transfers to the surviving spouse. Often times, tenants by entirety is employed as a method of asset protection. When used properly, tenants by entirety can be coupled with your estate plan, often superseding the last will and testament. For example, if I passed away and wanted to leave a piece of property to my children but had it titled as joint tenants, it would then pass to my spouse. But if I carefully outlined to titling as tenants by entirety, I can actually ignore the will.

I’ve seen this strategy used before when I was working with an advanced estate planner. There was a troubled family where the mother and father didn’t get along, and he didn’t want to leave anything for the kids either. Well, the attorney working for momma bear moved some things around and put them under tenants by the entirety so that when dad was gone, the kids were guaranteed an inheritance.

Convenience Accounts

More and more, these days, we are seeing convenience accounts being set up. Around the country, several states have adopted what is called the Uniform Multiple-Person Accounts Act and it, essentially, allows a party to act on your behalf in regards to your account, within predetermined parameters. It’s a similar idea to power of attorney but it doesn’t give as much authority to the appointee.

The convenience account bears no right of survivorship so the assets pass under the last will and testament. So, if you trust somebody to help you, this is a really good way to manage money. Many times, we see a convenience account used by aging parents and they appoint one of their children to be the signer on the account.

Estate Planning Types Of Non-Qualifying Accounts

At this point, we’ve covered the types of individual non-qualified investment accounts, but now I’d like to shift gears. Let’s face it, studies show that as many as 100% of us will die at some point in our lives. I don’t know about you but to me, that seems like an inevitability that we should plan for. As we continue, I want us to understand the types of non-qualifying accounts that are available to us when planning our estates.

Payable Or Transferable On Death

Sometimes you’ll hear these accounts referred to as designated beneficiary title. Whenever the person that set up the POD or TOD accounts passes away, immediately moves money to its beneficiary. Usually, this can be done without getting the estate court involved. You will need a death certificate, of course, but you can move the money without having to go through probate.

Often times, as a person is aging and beginning their estate planning, they will set up a POD or a TOD to at least pay for their funeral. I have a client right now, whose parents recently passed away. My client didn’t really have the finances in place to afford to pay for their funerals. His parents had a large amount of money and, had they properly set up their accounts, we could have used a POD or TOD to aid my client in covering the funeral expenses.

Estate Account: What Is Its Function?

Presuming that you have been named the executor or executrix of Mom and Dad’s wills, you need to set up an estate account. When they have passed on and you begin to sell off their assets, all of the money from those sales goes into the estate account until the taxes have been paid. At that point, the remaining money can be distributed according to the last will and testament. Essentially, the estate account is a temporary holding account while you go through the final wishes of the departed.

Conservatorship Account

This one is similar to the estate account except, with a conservatorship account, somebody is trusting you to manage money on their behalf. A lot of times, you’ll see this when an organization is depositing money into an account. They will assign a conservator to handle the distribution of funds.

Guardianship Account

Mostly, guardianship accounts come into play when the parents of minor children have passed away and leave monetary assets to them. So the guardian will set up an account in the children’s names and then they will monitor the funds for the children. Often times, you will see this done through a trust, but it can be done through a guardianship account as well.

In Conclusion

I know, I’ve discussed a lot of material here. There’s going to be good and bad with each of these account types but it’s important to understand how to title each of them. Most of your titling is going to serve as estate or asset protection. The non-qualifying nature of these accounts means that you really aren’t going to receive much in the way of tax benefits. However, choosing the proper titling could be the difference in whether or not your intended beneficiary receives the assets you intend for them.

This is why working with a good financial planner is so important. They can navigate through the complexities for you and enable you to live financially simple. If you’re unsure of what steps to take in setting one of these accounts up or you’re just looking for a financial planner,  feel free to reach out to me or to one of my team.

Get the most out of our Investing segment by following along with our Personal Finance for the Business Owner series.