There’s no point to having a living trust if you don’t fund the dang thing! The trust operates for the benefit of your loved ones and heirs, but it’s useless unless your assets are moved into the trust.
The primary goal of the living trust for most folks is to avoid probate. And to avoid probate, you need to have the bulk of your assets either in the trust or titled with a named beneficiary. So I’m going to outline here the major things that should either be named in the trust or have designated beneficiaries.
Your Home and Other Real Property.
Retitling your home and real property in the name of your trust is always recommended to help avoid probate. Retitling your home is a fairly straightforward process: establish your trust, complete a trust transfer deed, and record the deed with the county (along with the PCOR form). And that’s it!
Of course, complications can arise with the recording of the trust transfer deed if the deed isn’t completed correctly or if there’s an obvious problem with the chain of title. You can also avoid probate on real property by using a transfer on death deed, but I generally recommend against transfer on death deeds.
With bank accounts, I’m referring to general bank accounts (e.g., Checking, Savings, Money Market, CDs). I’m not referring to brokerage accounts or qualified retirement plans – see the next post for more on those topics. There are three ways to set up a bank account to avoid probate. The first two deal with the living trust and the third doesn’t involve it at all.
So, for putting bank accounts into a living trust, there’s generally two schools of thought. Neither are wrong. First, some folks believe that all bank accounts should be in the name of the living trust. This allows the trustee to access the bank account. The upshot here is that if you’re the original trustee and you become incapacitated, then the successor trustee can access the account. This circumstance would block whomever is your designated agent via the durable power of attorney from accessing the account.
Second, other folks believe that the living trust should be named as the beneficiary of the bank account. This means that the account would automatically move into the name of the trust upon the death of the account holder. The only caveat here is that if the account holder becomes incapacitated, then the designated agent via the durable power of attorney is the one who can access the account, not the trustee.
Finally, the third option is to just not include the living trust as the account holder or the beneficiary and to name beneficiaries outright. Although naming beneficiaries outright might allow the account to avoid the probate process, it might also lead to inequitable distributions of your estate assets if you have multiple folks you want leave inheritance to and you don’t keep on top of your accounts. Additionally, problems arise if your beneficiaries predecease you.
Tangible goods without title are by far the easiest property to add to a living trust. Your trust should have a schedule of trust assets, likely named “Attachment A” or something similar. List on that schedule a description of all of the tangible goods which you’d like to include in the trust. That’s it!
There are two keys points here. First, you can’t include anything that has a title. So your prized collector’s Harley Davidson will need to be moved into the trust by way of a title transfer coordinated through the DMV. Second, you don’t need to include everything in the schedule, but you shouldn’t neglect this task either. As a rule of thumb, I recommend including anything with a fair market value of over $1,000 in the trust. This is generally furniture, art, jewelry, substantial electronic equipment, and tools.
In the next blog post, I’ll wrap up this topic and discuss how brokerage accounts, business interests, and insurance policies should be established in relation to your living trust and beneficiaries.
Trusts are an important estate planning tool. Trusts allow one to ensure their assets are protected from unnecessary taxation and government interference and, almost just as important, permit intentional asset distribution at defined points.
Unlike a will, where you just say who gets your stuff once you pass away, a trust allows you to establish parameters for how and when your assets are distributed. This flexibility allows the settlor (the person who established the trust) to influence the behavior of their beneficiaries. The settlor can incentivize the beneficiaries by establishing benchmarks that the beneficiary must meet to reach asset distribution. The three most common incentive goals I see are related to education, productivity, and charitable endeavors.
Asset distribution tied to educational goals is a common tool I see in trusts for young beneficiaries. It is typical for parents to note in their trust that the assets may be used for “college” for their children. However, it’s important to provide objective boundaries for what constitutes “college” expenses might be allowable under the trust.
First, define what “college” type of school are you referring to when you say “college”? Is a community college acceptable? A four-year state university? A private, unaccredited school in a remote forest? What about graduate school for advanced degrees? It’s important to define what would constitute “college”, but also take into consideration the beneficiary and what path they might pursue. Don’t rule out trade schools or college alternatives.
Second, define what “college” expenses would be payable under the trust. Is it just tuition? Tuition and living expenses? What about books, computers, student activity fees? Be clear about your intentions and what is and is not an allowable expense under the trust.
Third, provide benchmarks for the circumstances that would trigger “college” expenses to be paid. Would you want the beneficiary to receive a lump sum payout after they’ve earned the degree? Or maybe provide a payout after each successful semester or quarter? What about GPA? Should they have to maintain a 3.0 or higher?
With educational goals it’s important to remember that you are trying to incentivize certain behavior. It might seem callous to out a GPA requirement on the payout, but you’re trying to get the beneficiary to work toward a goal. You probably don’t want to be stuck in a situation where you’ve paid for 6-7 years of college expenses for the beneficiary to dropout without a degree. Be clear about your goals.
You want your beneficiary to learn a work ethic, but you also want to leave them your assets. Those goals are not mutually exclusive. Productivity goals are a good tool to incentivize the beneficiary to work to earn an income before receiving your assets.
For example, you could set up a trust to provide dollar-for-dollar matching distribution. The match would be based on whatever income is reported on W-2s for the previous year. If they earned $36,000 working a menagerie of part-time jobs, then the trustee would be authorized to distribute $36,000.
You could also add other requirements, like the work must be full-time or they must work a certain number of hours a week to earn the trust distribution. Again, you’re trying to incentivize them to work.
The key with productivity goals is to ensure that the beneficiary will engage meaningful employment based on their abilities. The difficulty though is that you can’t predict the future as to what meaningful employment might look like for the beneficiary. If the beneficiary suffers a horrible accident and has trouble holding down part-time work, would you want them to be cutoff from your trust? It’s advisable to allow trustee discretion for productivity goals in the event the beneficiary is legitimately limited from reaching the productivity goals.
Charitable goals are the final common goal for incentive trusts. Charitable goals arise when you want to ensure that your beneficiaries do good in the world. This usually arises by requiring the beneficiary to volunteer for a certain number of hours or donate a percentage of their income to defined charitable causes to receive payment under the trust.
Charitable goals also arise in the context of directing ecclesiastical work. Trusts can hold clauses that allow for payout in the event of missionary trips or seminary courses. The key with charitable goals is ensuring that the beneficiary’s charitable work is work that the trustee would support. This is where it’s important to set clear definitions of what charitable work would and would not trigger payment under the trust.
In conclusion, as I mention all the time, it’s critical that you Make Your Plan. Don’t do just what somebody else tells you to do. And don’t use one of those fill-in-the-blank forms you can find online or at an office supply store. I want to work with you to Make Your Plan to ensure your loved ones receive exactly what you want them to receive.
A transfer on death deed is a mechanism that can keep a home or other real property out of probate upon the property owner’s passing. The transfer on death deed effectively says, “When I pass away, I want this piece of property to go to so-and-so.” Transfer on death deeds are a completely legal way to transfer real property, but I generally caution against using the deeds. I caution against transfer on death deeds because they are not as dynamic as a living trust and can lead to unintended disputes after passing.
No Efficient Remedy for Predeceased Beneficiaries
To me, the most significant shortcoming of the transfer on death deed is that there’s no way to offer alternative beneficiaries if one of the beneficiaries predeceases the transferor. (see PROB § 5652(a)(4)). This is a major departure from other estate planning tools like a will or a living trust. Wills and living trusts allow you to name alternative beneficiaries in the event the intended beneficiary passes away before you.
For example, say you have two children who each have their own children and you want to leave your family’s cabin to both of your children and their families to enjoy. So you set up a transfer on death deed naming your two children as beneficiaries. Unfortunately, one of your children predeceases you and you don’t change the transfer on death deed. When you pass away, the family cabin would be left entirely to the child who survived you. Your other child would not receive any interest in the property under the transfer on death deed, leaving that child’s family with no legal interest in the family cabin. Under a will or trust, you likely would have said that your child’s family would take an interest in the family cabin if the child predeceased you.
Not Effective for Properties Held in Joint Tenancy
Transfer on death deeds are void and ineffective if a property is titled as joint tenancy or community property with right of survivorship. (see PROB § 5664) An interest in a property held in joint tenancy immediately passes to the other surviving tenants upon one of the tenants’ passing, so it makes sense that a transfer on death deed would not effect a joint tenancy.
A transfer on death deed is similarly ineffective if spouses who own a property together try to establish a transfer on death deed. When one of the spouse’s passes away, the remaining interest would automatically go to the other spouse, making the transfer on death deed void. Finally, the surviving would have to create a new transfer on death deed since they are the only remaining interest holder in the property. Establishing a living trust would solve the joint tenancy problems with transfer on death deeds.
No Way to Designate Shares
A transfer on death deed transfers the property to the beneficiaries as tenants in common in equal shares. (see PROB § 5652(a)(3)). This means that if there are two beneficiaries, each would receive a ½ interest in the property – you’re not allowed to split an interest ¾ for one person and ¼ for another person. This becomes problematic if there is reason to provide unequal distribution.
Difficult to Revoke
Finally, transfer on death deeds have statutory requirements for revocation. Unlike a will or trust that could be revoked immediately by a simple amendment, a transfer on death deed must be signed, notarized, and recorded with the county within sixty days of notarization (see PROB § 5632). Adding extra steps to the process increases the likelihood that the revocation won’t be effective because of delays, missed steps, etc.
In conclusion, I rarely recommend transfer on death deeds due to their rigid requirements and ack of flexibility. You will not find a transfer on death deed as part of BDR’s Four-Part Plan because they are not the most effective method to Make Your Plan.
Planning your estate if you have minor children is very different than if you have grown children or no children. You need to make sure your children will be cared for while they’re still minors and that they have financial stability when they each adulthood. The three necessary elements for your estate are a will, a living trust, and life insurance.
Everyone needs a will. I’ve been over this before. It’s a simple two-part test: (1) Do you own stuff?, and (2) Are you going to die?. If you answered “Yes” to both questions, you need a will.
For parents of minors, the will’s function goes beyond disposing of your assets. A will also allows a parent to designate guardian(s) for their child. The guardians are the ones who will be responsible for raising the child in the event the child’s parents pass away.
Designating a guardian is an important detail that many people overlook because they think their loved ones will just figure it out. “Well, shouldn’t the kids just go to my [parents/sibling/friend]?” is a question I get all the time. The problem with not designating a guardian is that your loved ones might have disagreements about who you would’ve wanted to serve as the guardian. Then they’re going to get involved in custody dispute simply because you didn’t write down your wishes.
Of course, when determining legal guardianship after a parent passes away, the child’s other parent will be first in line to raise the child regardless of what your will says. And the courts still retain some authority to overrule your will (e.g., the guardian you proposed has developed Alzheimer’s disease and can’t care for themselves).
A Living Trust.
A living trust is an essential tool to protect your children’s future interests because it allows you to designate the ages or stages when your child can receive your assets. Imagine this scenario: Your child is 17 years old when you pass away unexpectedly. Your will designates your child as the sole recipient of your assets, which includes a house, a 401K, a car, and your bank accounts. The assets are managed by a fiduciary for a few months until your child 18, then your child receives all of your assets. Does your child have the tools and temper to handle those assets?
Do you remember when you turned 18? If you had received several hundred thousand dollars, what would you have done with it? For me, I would have stopped working, bought a new Mustang, and probably would’ve blown the rest of the money.
That’s why I recommend parents of minor children establish a living trust to control the distribution of assets to their children. The living trust can include provisions like restricting the use of the trust’s assets for college or necessary medical expenses until the child turns a certain age. Or you can designate that a child receives lump sum payments from the trust at certain ages (e.g., ¼ at age 18, ½ at age 25, and the remainder at 30).
The purpose of life insurance is to protect your loved ones’ financial interests in the event you pass away. If you pass away and leave several young children, life insurance is a critical tool to ensure there is money available to meet the children’s needs.
It’s important to ensure you name your living trust as the beneficiary of your life insurance policies. The trust will hold the proceeds from the policy and the distribution of the proceeds will occur according to the trust. If you simply name your children as the beneficiaries, then they will receive a lump sum payout when they turn 18.
A common estate planning goal I hear is that folks want to ensure their children and grandchildren receive as much inheritance as possible. The folks want to make sure their assets are not consumed by taxes, probate fees, and other miscellaneous costs.
But what most folks don’t want to talk about is debt and how debt is handled at death. It’s an icky subject – discussions about debt can get wrapped up in embarrassment and guilt. But debt occurs, and a plan needs to be in place to deal with it.
To be clear, this post is being written as general information only and is not legal advice for any particular situation.
Foremost, I always recommend planning to eliminate debt. The best way to protect your family from dealing with your debts is to ensure you don’t have any debts! Most folks think estate planning is only concerned with distributing assets at death, but it’s really about ensuring that your affairs are in order in case you pass away (which you will!).
I understand that folks regularly pass away carrying debt. I receive regular inquiries about how to discharge debt at death. And I regularly tell folks that most debt doesn’t just disappear at death.
It’s rare that debt is discharged at death. Some federal student loans can get discharged at death (but not private student loans), and some unsecured debt can get discharged at death. Unsecured debt is generally only potentially dischargeable if the estate has not other assets to pay off the debt.
So the worst thing you can do is hope that your heirs won’t inherit your debt. They will! So Make Your Plan!
If the debt is secured by an asset, like a mortgage is secured by a property, or an auto loan secured by a vehicle, then the loan must be satisfied or else the lender may force the sale of the asset to satisfy the debt.
If you don’t clean up the debt, or at least make a plan for it to be dealt with, then your heirs will be forced to deal with it. And your assets, that you wanted to make sure to pass on to your children and grandchildren, will get tied up cleaning up debt instead of being passed on to your heirs.
In conclusion, the key takeaway is to avoid debt so you’re heirs don’t have to deal with it at death. The debt won’t go away. The lenders will always want their money back. And unless there are no other assets to satisfy the debt, then it’s exceptionally unlikely your debt will be discharged upon death.
Liquidity is an important consideration in the estate planning process. Upon your death, your family will be met with many expenses, such as burial costs, debts, and taxes. Your estate should be arranged in a way such that there is adequate assets to liquidate to cover the expenses. Most people cover the immediate liquidity need by purchasing life insurance policies.
The key to understanding liquidity at time of death is the immediate nature of the expenses. For example, if the deceased is the sole provider for the family, then drawing down cash from a checking account for burial expenses may be possible, but it may leave the family with no cash for groceries and recurring bills and expenses.
Additionally, the estate should not rely on the liquidation of assets to meet expense needs. The forced sale of assets rarely meets the hopes of the family. For example, people go to estate sales and garage sales to get good deals on items that need to move. Fair market value is a foreign concept for the immediate liquidation of assets in an estate sale.
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Brian Russ is an estate planning attorney in West Sacramento, Yolo County, California. Call today to schedule a free estate planning consult: (916) 750-5155.
Originally posted in January 2018.