If you have a trust and set it up to avoid probate when you pass away, which is a very common goal for estate planning, then you need to watch this video.
First, congratulations on getting your trust set up. You’ve taken a great first step for making things so much easier for your family to administer your estate when you die. But there can be a real problem with trusts that we see too often. We’re going to address that in this video.
The issue is having a trust and not having it funded. By that I mean having your assets coordinate with the trust plan. Retitling your assets so they are owned by your trust, or changing beneficiary designations so that they will go to your trust upon your death.
Too often we see that people who did trusts with other attorneys just set up the trust and didn’t do any funding. They still own their home, their bank accounts, their vehicles, etc. in their name. What that means is that even though they have a trust, those assets will still have to go through Probate when they die.
The key to estate planning and estate administration is OWNERSHIP of assets. We’ve talked in other videos and articles about what probate is, but let’s take a quick review. Probate is needed to give someone authority over the assets of someone who has passed away. If a person owns a house and dies, then no one has the authority to sell that house. A probate is needed in that case, and the probate court gives the legal authority to sell the house (or to access any other assets) to the Executor. The executor then has the ability to do that.
If, on the other hand, the person didn’t own the house in their name as an individual, but instead owned the house in their trust, then when thy die the person who is named the successor Trustee of the trust already has the authority to sell the house. Because the house in owned by the trust, then whoever the trustee is has the authority to deal with it. As I said, the key is ownership. So for assets like bank accounts, real estate, investment accounts, stocks and bonds, business interests, and vehicles, you need to change the ownership to your trust.
Updating your beneficiary designations is also another important part of funding. For your retirement accounts, you need to make sure that you DON’T change the ownership into your trust. That would be treated as a withdrawal of those funds and you’d have to pay taxes and maybe even penalties for that. Instead you change the beneficiary to coordinate with the goals you want your trust to accomplish. That can be a complicated discussion, so make sure you talk with your estate planning attorney about your options and how you should do that in your particular situation.
For life insurance, we generally suggest that the trust be made the beneficiary of the life insurance. Even though life insurance already avoids probate, when you make the trust the beneficiary, then your successor trustee can get those funds and use them to pay expenses and taxes and then distribute the balance of the funds the way the trust directs. It’s a much more streamlined approach.