We’ve been examining adding a revocable (a/k/a living or inter vivos) trust or irrevocable trust to your estate plan. Trust instruments are an important part of your estate plan, particularly if you have a spouse and young children you wish to provide for upon your death. When mistakes are made, in establishing or setting-up a trust, the errors are borne by your survivors.
When problems arise in trusts they tend to involve issues with trust funding, policy titling, and beneficiary designations. When neglected these issues have their way of creeping into the lives of your loved one and will require significant amounts of money and time being spent that could have otherwise been avoided. What follows is a primer on the top 4 scenarios your survivors will need to get through to correct any problems associated with trust funding, policy titling, and beneficiary designation.
No. 1 – Avoiding probate
The probate process, which must be conducted in each state in which the decedent owned property is costly and timely. Any asset owned by the decedent is subject to probate. Probate can be minimized by taking assets out of your estate and placing them in trusts or by planning for their transfer to family or survivors via will.
Generally, assets in a trust are not subject to probate – making trusts very attractive to individuals who want to place their assets in the hands of a spouse, partner, or close family member. The mere creation of a trust does not transfer assets into the trust however. You must take steps to legally transfer assets or property into the trust instrument you created for it to be effective. Trust funding problems may be avoided by making sure that after you create the trust, you transfer the assets that are now managed by the trust.
No. 2 – Guardianship court and reliance on financial powers of attorney
When a revocable trust is established, you determine how your assets should be managed and by whom in the event of your disability. If the trust is not funded, meaning the assets do not get transferred into it legally before a period of incapacitation, then the trust cannot be used for the purposes you designate. Any provision in the trust will not apply to those assets. For management of the assets, a guardian will need to be appointed by a court and an agent designated under a financial power of attorney, if one is not already part of your estate plan.
If the person with the financial power of attorney is someone you already designated, the estate plan will kick in and that individual will manage your financial affairs while you are incapacitated. If there is no financial power of attorney in place however, the court will appoint a person and that person may not be the individual you desire to run your financial affairs.
The best protection for the management of assets is by trust, not a financial power of attorney, because the trustee will owe special duties to you to manage the assets and income according to how you specified in the trust document itself.
No. 3 – Unintended beneficiaries of retirement accounts and life insurance policies
Trust funds include life insurance proceeds and other accounts and policies payable to beneficiaries. If those accounts and policies do not properly designate your trust as a primary or contingent beneficiary, then those funds will pass to the beneficiary directly, disregarding any of your instructions from the trust document. The result of the distribution may be that your beneficiary receives more or less than you attended or sooner than necessary, defeating the purpose of the establishment of the trust.
No. 4 – No insurance coverage for your home
Many people retitle ownership of their primary residence into a trust. When that happens, many former homeowners forget to seek retitling of the homeowner’s insurance to name the trust as the insured not you individually. Any claim that may be submitted to the insurance company following catastrophe or damage may be denied because you are not covered by the policy. The trust not you own the home, any insurance proceeds will only be distributed to the trust.
If you retitle ownership of a primary residence to the name of your trust, the trust should be named as an insured on your homeowner’s (and umbrella) insurance policy. Even if you do not retitle your primary residence into the name of your trust (perhaps it is held as tenants by the entirety), your trust should still be a named insured since you transferred (or should transfer) your tangible personal property into your trust.
Changes to U.S. Tax Code
On January 1, 2018, changes were made to the U.S. Tax code. The most significant change was doubling the federal estate tax exemption to $11,400,000 for a single person or nearly $23,000,000 for married couples. Make sure any existing trust is updated to take advantage of the new tax laws.
Estate taxes are notoriously high. Make sure you have transferred assets at a similar value. The IRS frowns upon land sale transfers for $1 and will tax you anyway at full market value. Estate tax planning is part of establishing a will, trusts, and other end-of life planning instruments.
A final note on minor children
Make sure your will and trusts documents are updated to include all of your children. Many people create a will and forget to update it when a new child is born or worse, plan to update their estate documents but put it off until it is really late. We touched upon the appointment of a guardian to handle your financial affairs should you become incapacitated in our last post. The same is true for children. Identify a guardian, explain your instructions, provide guidance on how and when you wish your children to access monies from the trust or your will.