We see it all the time – people pay good money to set up a trust in order to avoid probate and minimize estate taxes, and then they fail to fund the trust. Without any assets in it, the trust will fulfill only some of its potential benefit.
Part of the problem is that it takes time to go to banks and brokerage firms to re-title assets, and it takes time and money to file a new deed making the trust the owner of your real estate. But the bigger problem is that people are unclear about exactly what they need to do. Although every situation is different, here is some general guidance about how to handle the ownership of your assets.
Beneficiary Designations and Joint Ownerships
It is important to understand that your beneficiary designations will determine who will take those assets, regardless of what your estate plan says – designations trump any language in your will or your trust. So, for example, if your trust states that your life insurance proceeds go to Jack, and your house goes to Jane, but your life insurance beneficiary is listed as Jane, then Jane will receive both the insurance money and the house, and, absent court modification, Jack is out of luck. This general rule is true of all beneficiary designations, including life insurance, investment accounts, annuities, pensions, IRAs, and 401(k) plans.
In addition, many bank and investments accounts, as well as real estate holdings, have joint owners who take ownership automatically at the death of the primary owner -- if spouses own their property as tenants by the entirety, the deceased’s one-half interest passes automatically to the surviving spouse upon his death. Other banks and investment companies offer payable on death (POD) or transfer on death (TOD) accounts that permit owners to name the person or people who will receive them when the owners die.
All of these types of ownership and beneficiary designations permit these accounts and types of property to be transferred outside of the terms of your estate plan, and without the need for probate. This works well in many cases, but rarely makes sense when you have established a trust that is meant to govern how the assets will be distributed.
When Should Your Trust Hold Title to the Assets?
If you have a revocable living trust, we generally recommend that you change the ownership of most of your assets so that your trust (or your spouse’s trust) is the owner, because the provisions of your trust only govern property held in the trust. There are some exceptions, and each plan is different, so be sure to discuss this with your estate planning attorney at the time that you create your trust. Here are our typical recommendations for the most common categories of assets:
Real estate: Re-title your real estate so that it is owned by your trust. If you have plans to re-finance, re-finance first, and make the title transfer afterward.
Bank accounts: All bank accounts and stock accounts should be re-titled to be owned by your trusts. (For checking accounts that hold less than $20,000, you may decide not to bother, since Massachusetts does not require a full probate for assets less than $25,000. You also may want a joint owner on such an account for purposes of convenience in the event you become incapacitated or are simply unavailable.)
Life insurance: Make your trust the beneficiary of your life insurance policies.
IRA and 401(k) accounts: This one is more complicated because there can be significant tax implications to your beneficiary (both income and estate taxes come into play). The alternatives are explained in detail here. For first marriages we usually recommend that clients name their spouse as the primary beneficiary and a trust as the secondary, or contingent, beneficiary. This allows the spouse the option of rolling over the account into his or her own retirement account, and permits the spouse to refuse some or all of the inheritance through a "disclaimer" so it will pass to the trust. Known as "post mortem" estate planning, this approach permits flexibility to respond to "facts on the ground" after the death of the first spouse. (Note that for a Roth IRA, earnings can be withdrawn tax-free so long as the account has been in existence for five years.)
Personal property: Ordinarily, title to personal property is not transferred to your trust – families tend to divide this up as they see fit. However, if you have valuables such as jewelry, art work or antiques, you may want to assign ownership rights to the trust.
If You Designate Individual Beneficiaries
If instead of transferring title to your trust, you retain title and designate beneficiaries, make sure you also name contingent beneficiaries who will receive the proceeds if the primary beneficiary passes away before you do. (Your trust can be named as a contingent beneficiary if you so choose.) If a contingent beneficiary is not named and you outlive the primary beneficiary, the proceeds will be paid to your estate, and will have to be probated. Also make sure to periodically review all beneficiary designations to keep them current.
For more information on beneficiary designations, contact Karen Mariscal, Esq.