Don’t Sabotage Your Estate Plan

Your living trust is your plan for how your money and assets (your “estate”) should be used for your benefit during your lifetime and for your named beneficiaries at your death. Usually a lot of time has been invested in creating and establishing such a plan: Time to meet with your estate planning lawyer to discuss what you want to happen; Time to gather your financial information; Time to share your dreams and hopes for the future regarding legacies you wish to leave behind; Time you spent reviewing the legal documents prior to signing; and Time you spent in transferring title of your current assets to your living trust. Yet, despite all of that effort, your chosen plan for distributing your estate at your death can go awry.

Here are some of the ways your estate plan could be sabotaged:

New Bank Accounts. I have been at different banks when I have overheard a bank representative asking an elderly customer whether he or she wants to name a pay on death beneficiary for a new bank account that is being opened. To my mind, answering “yes” to this question may have unintended consequences. For example, your living trust may name your children as equal beneficiaries. However, if you answer “yes” and name only one child as the pay on death beneficiary of your new bank account, your children will not receive equal shares of your whole estate. The child who is the beneficiary of the bank account gets all of the remaining money in that account as well as an equal share of the assets held in your living trust, a result you may not have intended.

Once you have established a living trust, the general rule is to open up all new financial accounts in the name of your trust. No pay on death designations for your accounts need exist. For those of you who are my clients, your Certification of Trust will have a statement which shows exactly how title should be held.

Retirement Accounts. Your retirement accounts are held outside of your living trust. The trust is not the owner of your retirement account, nor is it usually your beneficiary. Neither your trust nor your Will controls the disposition of your retirement accounts. Those accounts pass to the last person you designated as beneficiary in the retirement custodian’s records.

You should be sure to periodically check your designated beneficiary for each retirement account. Sometimes, a beneficiary was named correctly when the retirement account first opened, but that designation is lost or omitted when the account is transferred to a new financial institution. Sometimes, a beneficiary is designated but not updated when certain events happen in the participant’s life. For example, you could name your spouse when you establish your retirement plan, but fail to change the designation upon divorce, or you could name a child, but not change that designation if the child predeceases you.

Verify that your retirement plans have the current beneficiary designated at the following times: 1) when you first establish your living trust, 2) when you change jobs, 3) when your retirement plan custodian or administrator changes, or 4) when you review your estate plan because you want to make changes to your trust.

Not All Assets are Held in Trust. The terms of your living trust which set forth your plan for distribution upon your passing will control only the assets to which your trust has title. One of the most common ways to sabotage your estate plan is to fail to re-title your current assets in the name of your trust.

As you may recall from my other posts, assets held in your name alone may be subject to the probate process which is time consuming, public, and expensive. Since one of the primary purposes of a living trust is to avoid probate, being certain your trust is fully funded with all your current assets ensures that you will avoid the expense and delay of probate.

Note that different kinds of assets require different kinds of legal documents for titling them in the name of the trust. For example, a deed transfers legal title for your real property but an assignment transfers personal property. You may have business interests which require specific legal documents or the consent of other persons before such assets can be held in your living trust.

Work with your estate planning attorney to be sure that you have completed all the proper legal documents to title your assets in the name of your living trust. Going forward, think of yourself as the “Trustee” every time you undertake a financial transaction. If you act in the capacity of “Trustee” for all your financial transactions, you will ensure that your assets are held appropriately for your estate plan.

Re-financing the House.  If your house is currently titled in the name of your trust and you wish to refinance the mortgage, the ideal situation is to find a lender who is willing to lend to you as Trustee of your trust. This way, your house remains titled in the name of your trust and the terms of your trust will control what happens to the house at your death. However, sometimes you are required by your lender to take your house out of your trust for the purpose of obtaining a loan because the lender is providing the loan to you as an individual. In this case, it then becomes incumbent on you to be sure that title to your house returns to your trust once escrow on the refinance has closed.

See the prior note about working with your estate planning lawyer to be sure the appropriate legal documents are completed for the house to be held in your living trust.

Not Updating Your Trust. Your living trust is intended to be a set of instructions about how your estate is to be distributed both during your lifetime and at your death. The terms of your trust include the identity of the person establishing the trust (you), who manages the trust assets (you, during your lifetime, your Successor Trustee at your incapacity or death), who inherits your estate at your death (your beneficiaries) and on what terms.

It is important to review and update your living trust and ancillary documents whenever there is a change in your life such as a birth, death, marriage, divorce, change in relationship with persons named in your trust, or changes in the law. Periodic review with your estate planning attorney will help you tie up any loose ends.