A common problem we see with many existing estate plans is the lack of asset alignment. Ensuring the proper titling of assets and that beneficiary designations fit hand-in-glove with your goals is critical to a successful plan.

I’m not sure my assets are properly titled into trust…

Either my trust was never funded properly or I never got around to making sure my accounts and assets were placed properly into trust.

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Do all Revocable Trusts Avoid Probate?

When you have a revocable trust, does that always mean that your estate will avoid the probate process when you die? You may be surprised to learn that the answer is “No.”

Why is that? First, let’s review what the probate process is. Many people think that “probate” means “taxes.” Probate is not a tax. Probate is actually a court process where your last will is admitted to court (authenticating that there are no other wills that supplant it), your personal representative is appointed to handle all estate matters (in some states this person is called your ‘executor’), your creditors are cleared, taxes are paid, accountings are filed, and eventually the beneficiaries receive their inheritance.

While revocable living trusts are designed to avoid the probate process, you actually have to transfer your assets into the trust to make that so. Unfortunately, many people believe that they transferred their assets into their trust when they really haven’t. I’ve found that a common misconception is that if you create a list of your assets and attach that list to your trust, then you have accomplished a transfer. That won’t work.

The correct way to transfer your assets into your trust requires a change on the title to those same assets. Suppose that Ted Turner owns thousands of acres of ranch land in Montana that he wants to put into his revocable trust. He needs to sign a deed that transfers his Montana ranch to the trustee of the trust. Most of the time the person who creates the trust acts as his or her own trustee. So the deed in this example would likely be to: Ted Turner, Trustee for the Ted Turner Revocable Trust dated July 1, 2010 (assuming that is the day that Ted signed his revocable trust).

The same holds true with Ted’s certificate of deposits, bank accounts and brokerage accounts. Ted needs to complete forms with his financial institutions that change the name on the account to Ted Turner, Trustee for the Ted Turner Trust. If he or his lawyer does not go through this exercise, then Ted hasn’t transferred his assets into his trust, and those same assets will therefore have to go through the probate process on Ted’s death.

Your wealth needn’t rise to the level of Ted Turner’s by the way, to benefit from a revocable trust. If your net worth exceeds $250,000 then you should take the time to consider whether a revocable trust is right for you. This depends largely not only on the value of your net worth, but on the types of assets that you own, and the facts of your individual and family situation.

Many people worry that once they transfer their assets into their revocable living trust, then they’ll lose control over those assets. This simply isn’t true. Since by definition the grantor of a revocable living trust can amend or revoke the trust at any time, he or she controls the trust and the trust assets as long as they are alive and competent. Generally speaking, the grantor of a revocable living trust can consume, sell and transfer any asset at any time without restriction.

It is not uncommon for people who have revocable living trusts to die with assets outside of the trust requiring a probate. This isn’t the end of the world. When you have a revocable living trust, your will becomes something known as a “pour over will.” If you read the provisions of your pour over will carefully, you’ll see that your will doesn’t really say who is to get what from your estate.

Instead, you’ll find that the will directs distribution of those probate assets into your revocable living trust. Your will acts as a “safety net” – catching the assets that should have been transferred into your revocable living trust during your lifetime – transferring them at your passing into your trust.

This highlights another benefit to revocable trusts. Note that the pour over will doesn’t say who gets what from your estate – and how they get it. It simply says to transfer any probate assets into your trust for distribution in accordance with its terms. All wills are public documents since they have been filed with probate court. Anyone can go down to the courthouse and see your will after your death. In contrast, trusts are private documents. They are not filed publicly. So even if you have assets subject to probate at your death, if you have a trust the general public will not be able to easily see who your beneficiaries are, and what they are receiving. In today’s world filled with scam artists – this is a rather important benefit to trusts.

There are certain assets that should not be transferred into your revocable living trust during your lifetime. If you were to try to transfer your IRA account into your trust, for example, you would likely have to recognize all of the taxable income inherent within the IRA. Since IRAs name a beneficiary they do not go through the probate process at your death and therefore do not – and in fact should not – be transferred into your revocable living trust. Generally speaking, annuities also are not funded into revocable trusts for much the same reason.

If you are wondering whether the right assets have been properly transferred to your trust, you should visit with your estate planning attorney to review your current situation. Bring with you copies of your current deeds, brokerage, bank, financial statements and copies of any annuity, life insurance and IRA accounts along with their beneficiary designations.

When You Don’t Avoid Probate with a Trust

A couple of years ago, a very nice couple visited with me in my office. They had moved from Wisconsin, where their attorney was also licensed in Florida and had just completed a revision of their revocable trusts and related pour-over will, durable powers of attorney, health care surrogates and living wills.

They wanted me to represent them now that they had become permanent Florida residents, but they were quick to say that they had the utmost of confidence in their Wisconsin attorney who they assured me had taken the necessary steps to update their documents to Florida law. This couple merely wanted to meet with me and to seek my assistance when something happened to either of them.

“Normally, I would review your documents and your assets to ensure that your plan is up to date and congruent with your intent now that you live here,” I said.

“No, thank you. We’ll call you when we need you,” the husband replied.

That was the last I heard until recently, when the wife called me to tell me of her husband’s passing.  I asked her to provide me current deeds and financial statements so that we could implement the testamentary trusts found within their revocable trusts.

That’s when we discovered that nothing had ever actually been transferred into either her trust or his trust. “The assets in your husband’s name alone will be subject to a probate proceeding in order to get them into the trust for you,” I advised.

“But we were told that our trust avoids the probate process,” she said.

“It does.  But only when the accounts and properties are actually titled into the trust name,” I continued.  “Here, there are accounts in your husband’s name. So his pour-over will catches those assets and deposits them into his revocable trust, but only through a probate process.”

Looking through the trust instrument carefully, I noticed another problem. “The disposition of your home inside of your husband’s trust is an invalid devise,” I counseled.

“What does that mean?” wife asked.

“Well, Florida law contains unique and peculiar homestead provisions.  This doesn’t really have anything to do with your homestead property tax exemption nor your ‘Save Our Homes’ property tax assessment cap. Instead, the law centers on to whom you can leave your primary residence. When you are survived by a spouse, you need to leave it outright to him or her, or else you have an invalid devise.”

“Well, isn’t his trust mine now?”

“Yes and no.  You are the trustee of his trust and you are the primary beneficiary of the credit-shelter trust created for estate tax purposes. But despite these facts, the home as a part of his trust creates an invalid devise.”

“So what happens?” she asked.

“Well, you get to share the home with the children. You can either choose a one-half interest in the home or you could choose a life estate and they would get a current vested remainder interest.” I said.

“That doesn’t sound so bad.” She said.

“It might not be, unless you go to sell the home and you need the children’s permission, their agreement on the sales price, and they get a portion of the sales proceeds. Hopefully none of the children have any divorces or creditor problems going on now as that might affect the title as well.”

Needless to say, the wife wasn’t very happy with all of the obstacles that appeared before her in a most difficult time – after the loss of her husband. All of these problems could have been avoided with a review of the trust and the assets and corresponding action taken before anything happened to the husband.

While you might point out that the Wisconsin attorney could have done more, one doesn’t know the extent and scope of his representation. Perhaps he wasn’t engaged to also help transfer the assets to the trusts that he created. As far as the homestead laws, those are very particular to Florida. While the Wisconsin attorney indicated that he was licensed to practice law in Florida, he may not have had many clients here and may have been unaware as to the issues involved in the disposition of Florida homestead. Or it could have been that the clients assured him that the home was owned differently than it really was. It all could have been an innocent misunderstanding or a lack of depth of the engagement itself.

In any event, the morale of the story is clear. Even if you have a trust you might not avoid the probate process if all of your assets were never actually transferred into the trust, and when moving to a new state, beware of how your new home state’s laws affect your estate planning.

I’m not sure my beneficiary designations line up with my plan…

I want to make sure my beneficiary designations for things like retirement accounts and insurance are in line with my estate planning documents.

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Different Baskets

When choosing how to approach your estate plan, it’s important to realize that the different types of assets that you own have different legal and tax treatments. The way that I most often explain it is to consider them grouped into separate baskets, and then deciding how you want your estate plan to distribute each type of basket.

The first basket consists of your Florida homestead. Florida law limits what you can do with your homestead in your estate plan. My recently published book The Florida Residency & Estate Planning Guide details the complex issues surrounding the devise of your Florida homestead through your will or trust.

If you are married, for example, and do not have a nuptial agreement with your spouse, then you must bequeath your homestead in fee simple to your spouse. You cannot bequeath a life estate interest or put your homestead in some kind of a trust that benefits your spouse for life and then distributes it to others. If you do, then you have an invalid devise. I’ve written other columns on this topic before. If your plan involves bequeathing your homestead other than outright to your spouse, then this basket needs attention – and likely will need at least a limited nuptial agreement dealing with this issue.

The second basket consists of your IRA, 401(k), pension and profit sharing plans (“Qualified Retirement Accounts”). Here, whomever you leave these accounts to will have income tax liability associated with any withdrawals, just as you presently recognize taxable income (unless you have Roth accounts) when you take distributions. While a spouse is the only beneficiary who can “rollover” the account into his or her own account, non-spouse beneficiaries will have Required Minimum Distributions (RMDs) upon receiving an inherited IRA, regardless of their age. If a minor is named as a beneficiary, a court process will also be required without proper planning. Moreover, if you name a trust as the beneficiary of this kind of account, income taxes may be accelerated without proper planning.

The third basket consists of stocks, bonds, mutual funds, cash and bank accounts that are not Qualified Retirement Accounts. These assets receive a step-up in tax cost basis at the death of the account owner, meaning that unrealized capital gains are usually eliminated.  These types of accounts have the fewest restrictions on how you can bequeath them in your estate plan.

The fourth basket consists of closely held business interests. These assets aren’t easily disposed of, as they are not traded on any stock exchange. Moreover, you may have other family members or third parties involved in the business or entity. There may be a shareholder, partnership or membership agreement that either restricts the disposition, or requires that the interest first be offered to the other shareholders at death. In the case of “S” Corporation stock, there are important elections that must be made within a certain time period after the death of the owner, and the type of beneficiary is restricted under federal tax law.

The fifth basket consists of annuities and life insurance policies, which have beneficiary designations. Annuities are similar to Qualified Retirement Accounts because the beneficiary will usually recognize taxable income when receiving distributions. Wills and trusts generally do not govern the disposition of these assets unless they are named in the beneficiary designation.  Trusts named as beneficiaries of annuities may incur higher income taxes than direct beneficiaries due to their compressed federal income tax rate structure.

The sixth basket consists of real estate that is not your Florida homestead. There may be inheritance taxes associated with this asset if it is owned in a state that imposes such taxes. In my book I detail all 50 states’ income, estate and gift tax consequences of owning property in each state.  Commercial real estate may be held in the form of a corporation, partnership or LLC discussed above. The ongoing management of this asset should be considered in your estate plan.

Yet another basket might be a trust in which you are a beneficiary and possess a “power of appointment” that would allow you to alter its disposition from the default provision in the governing document, which might be a parent’s will or trust. Your attorney should determine whether you have a power of appointment, whether it is limited in any way, and whether the value of the trust will be considered taxable in your estate for federal estate tax purposes.

There may be other baskets in any individual plan. So as you can see, when planning your estate, all of the different baskets should be considered, along with their unique legal and tax consequences. Failure to consider the intricacies of each type of asset might result in missing planning opportunities or in unintended adverse results.