For some people setting up your trust estate plan can be a daunting task. You are forced to think about your least favorite subjects, death and taxes, and make critical decisions about how to distribute your estate. The final trust signing appointment is usually followed by a sigh of relief, with the plan to put your estate planning folder in a safe place for future generations.
But wait, there’s more….
The Most Important Part Of Setting Up Your Trust
Many people don’t sit down and take the time to read through their estate plans after their review and signing with their attorney. Usually, this includes an instruction letter on how to “fund” your trust. Unfortunately, this is the part of estate planning that many people skip.
To put it simply, a trust is a naming convention, or a bucket, to hold and protect your assets. You want to put all the assets that you can into that bucket. In order to actually put the assets in the bucket, you must retitle them so that they match the title of your trust. Because the title to your home lives at the county recorder’s office and your bank and brokerage accounts live at the financial institutions, you cannot physically put them in your bucket. You must retitle them so that the place where they live knows they belong in your trust. If these accounts are not in your trust, they won’t be available to your trustee to manage for you if you get sick, or to distribute to your heirs after your death.
Remember To Retitle Your Deed & Accounts
If you do not retitle your house deed or rename your bank accounts, then your trust will not be honored by the county or banks when the time comes to administer your trust. This will often result in probate court, which is not the purpose for which you just spent time, money, and effort creating your trust estate plan. Probate is a court proceeding that is required in California when a decedent owns assets only in their name (not in their trust), and is required for real estate valued at over $55,000, or any assets with a total value of over about $166,000. Probate in California currently takes about 2 years or more and costs a percentage of the gross value of your estate.
Here are the most common assets that end up causing probate within a trust administration:
- Real estate, bank accounts, stock, bonds and mutual funds not titled in the name of your trust.
- Property that is held jointly with family as tenants in common: joint tenancy will work with a right of survivorship, but creating a joint tenancy has very specific requirements and the default way of holding title is as “tenants in common”. We often see deeds with no stated form of title, which by law defaults to tenants in common. Tenants in common means the owners can do what they want with their share, such as gift it, sell it, or bequeath it via a will or trust, but if it’s not in the trust, then it must be probated. There is no right of survivorship with tenants in common.
- Inherited property that was not retitled: if you inherit a home, a bank account, even an IRA, even though it is now yours by operation of law (meaning the person who left it to you has died), if you do not take care of the proper paperwork to either retitle the assets in your name and trust or designate new beneficiaries, then on your death and the asset go to probate.
Here are the normal assets that should go into your trust directly:
- Bank accounts
- Real estate
- Brokerage/investment accounts
- Stocks/mutual funds
- Business interests (corporations, LLCs, partnerships, sole proprietorships)
What does not go into your trust:
- Stock options
- Any other tax-deferred plans
- Life insurance (Trust should be named as beneficiary)
These tax-deferred accounts, or assets not yet vested, do not go into your trust, but you can, and should, designate beneficiaries for these accounts in line with the distribution plan for your estate. There may be instances where you want the trust to be the beneficiary of these plans, but please consult with your attorney first.
Funding a Trust; One and Done?
The good thing about funding a trust is that typically you only have to do it once. If you amend or restate your trust in the future, you do not have to redo the funding. The original name and date of the trust remain the same. Any assets you get rid of, such as selling a house or closing a bank account, have no effect on the trust. If you open a new account or purchasing real estate, you can do so directly in the name of your trust. The only update you should make is to update the asset schedule of your trust, and if necessary make changes to distributions because of these new assets.
Are You Worried About Your Estate Plan or Trust?
Setting up a trust and estate plan is a potential minefield you don’t want to tackle on your own. Whether you have a plan in place now or need to start from the beginning, we can help. For over 30 years Joel A. Harris has been protecting the estates of families throughout California. If you want some help navigating the ins and outs of protecting your estate or establishing a trust to protect your future, feel free to visit us online, in person, or call us by phone at (925) 757-4605.