I have been writing about building flexibility into your trusts and your estate planning in general. Proper estate planning allows you to take care of your spouse, children, and other descendants well into the future, save estate taxes, and protect your assets.
Once you have signed your estate plan, what do you do next? It usually makes sense to fund your Trust; i.e., transfer assets you own into your Trust.
This accomplishes many things:
• Assets in the Trust avoid probate and allow immediate access to your family after you die.
• A Trust is private and the terms of the Trust as well as the assets in the Trust remain private. A Will, when probated, becomes a public document.
• A successor Trustee is in place to take over for you if you become incompetent, without needing a conservator to manage your assets.
• A funded Trust ensures that there are assets in the Trust so that the tax plan will work.
This last point can prove to be frustrating if the Trust is not funded during life. Recently in a few cases, I have discovered that some married clients have not funded their trusts as we discussed. This often means that the Trust could not be funded after the first spouse has died, which could lead to having to pay more estate tax when the second spouse dies.
In one case, after setting up their Trusts and without telling me, one married couple made all of their assets payable on death to the survivor of them, and otherwise to their children outright as contingent beneficiaries. This action bypassed the Trust and the tax plan altogether.
In another case, as part of the initial planning, the couple separated ownership of their assets so that each owned approximately 50% of their assets in each of their names alone. The expectation was that the separate assets would fund each of their Trusts. Several years later, the clients forgot why they separated their assets and put all assets back into joint names. One of these clients has now died and there is no asset owned by the Trust or passing into the Trust. The good news in this case is that the survivor can disclaim (essentially renounce) the 50% interest deemed to be owned by the deceased spouse. This allows for 50% of the assets to go through probate and into the Trust so that the estate plan can work as intended. However, it will now be necessary to probate the estate. This could have been avoided if the Trust has been funded during life.
These examples illustrate the importance of funding your Trust soon after you sign it and getting appropriate “Change of Beneficiary” forms for life insurance, annuities, retirement assets, payable on death (POD) accounts, etc. to name your Trust as the primary beneficiary. Then the estate plan will work as intended and all of your good intentions will not be for naught.