Setting up a revocable trust is like building a treasure chest. When you pass away you want that treasure chest to go to your children, or other beneficiaries, filled with your property and assets. But what happens if the chest is empty when your heirs receive it? One of the biggest mistakes in estate planning is the failure to properly transfer your assets into your trust.
After a trust is created and executed, the next step is to make sure all of your property is transferred to the trust, either immediately or at a later date through beneficiary designations. This process is referred to as funding the trust. Any assets which are not transferred to the trust will have to go through a probate, which is likely what you are trying to avoid by setting up the trust in the first place.
Many estate planning attorneys handle trust funding in different ways. Some of my clients who had estate planning done by other attorneys discovered that only some of their assets were transferred into their trust. Others had no property transferred. Other attorneys, myself included, are diligent to make sure that everything is properly transferred into a trust in order to avoid any probates down the road.
What should be done with your property to make sure your trust works properly when the time comes? Different types of property are subject to different rules which may determine how best to transfer these assets. It is a good idea to accurately inventory all your property and bring that information with you when you meet with your attorney. Here are some examples of how different types of property can be handled.
One method of transferring real estate to a trust is for the owners of the real estate to deed the property to the trust. This makes the trust the legal owner of the real property. A couple issues to consider with this method are potential problems with refinancing and home owner’s insurance. When refinancing a mortgage, companies often prefer to finance in the individual owner’s name. Real estate that has been transferred to the trust may be transferred out of the trust to be refinanced. If you forget to transfer the property back into the trust before your death, then that property is going to have to go through a probate when you die. Another potential issue may arise if your insurance company refuses to pay on a claim because the owner of the property (the trust) is not the name of the insured on the policy (the individual).
A solution to all of these issues is a ladybird deed, or sometimes called a beneficiary deed in other states. A ladybird deed is a deed in which you retain title to your property while directing that upon your death the property be transferred to your trust. While you are living, you can still sell or convey the property but so long as the property is still yours when you pass, all your trustee will have to do is present the county clerk with a death certificate to have the title pass to your trust.
Bank Accounts and Investment Accounts
All bank should have procedures to add “payable on death” designations to your accounts. A payable on death designation does just what it says. If you direct that your account is paid to your trust when you pass away, then all your beneficiary will need to do is provide the bank with proof of your passing.
Similarly, investment accounts, stocks, bonds, and other investments types, can have “transfer on death” designations added to them.
Retirement Accounts and Life Insurance
If you currently have an IRA, 401(k), or other type of retirement account, it is likely that you have set up beneficiaries to receive those funds in the event of your passing. For tax reasons, it is generally not recommended to make a trust the direct beneficiary of a retirement account. However, there are ways to set up a retirement account to pass through a trust if you have concerns about a beneficiaries’ health, creditor problems, or potential for divorce. To explore these options more, talk to your attorney or accountant.
Life insurance policies are also considered non-probate assets because you name a beneficiary for the policy. If your trust provides for managed distribution of your trust property it is a good idea to have your trust be the direct beneficiary of the policy.
In the event there are assets that need to be probated after your death, it is still important to have a Last Will and Testament, specifically a “Pour-Over Will”. A pour-over will, usually executed at the same time as your trust, directs that any of your property that has to be probated should be distributed to your trust. If you do not have a pour-over will, or any will at all, your assets will pass according to the intestacy statutes of the state. This would mean that any specific instructions you have left in your trust will not be followed and any beneficiaries who are not your immediate descendants will not receive their share of that property.
Consider reviewing your estate planning and let’s make sure your trust is properly funded. Make an appointment today!
Jessica Brandow is foremost an estate planning attorney dedicated to providing quality legal service to all types of clients.