As part of the estate planning process, many people create revocable (aka
living) trusts. Trusts can be used to avoid probate, but only if they
are funded before you pass away. Funding a trust is an oft-forgotten step
in the estate planning process. If not done correctly or at all, then
many of the purposes and expected benefits for which the trust was created
could be lost. Chief among those is that avoiding probate may not be accomplished.
Worse yet, your ultimate distribution plan may conflict.
To fund a trust, your assets need to be transferred to the trust. Accounts
and real estate deeds need to be re-titled to the trust and tangible personal
property needs to be assigned to the trust.
Retirement accounts such as IRAs and 401(k)s cannot be in the name of the
trust, but the trust can be a beneficiary of retirement accounts. To do
so, however, the trust must be drafted carefully to comply with IRS tax
regulations. Then, the trust can be listed as the primary or contingent
beneficiary on a beneficiary designation form.
In addition to problems caused by not funding your trust, your overall
distribution can be frustrated if your trust conflicts with your beneficiary
designations on your life insurance and bank, retirement and investment accounts.
For example, what happens if your trust leaves everything to your children
equally, but the lifetime insurance beneficiary designation only names
one of your children? Under Arizona law, what’s on the beneficiary
designation rules. So, in this example, the child named on the life insurance
beneficiary designation would get all of it. The same goes for anything
with a beneficiary or transfer on death designation, such as bank accounts,
retirement accounts, investment accounts, etc.
Similar conflicts can occur with real estate that is not titled (deeded)
to the trust. Many buy their homes or other property and take title with
their spouse as joint tenants or community property with right of survivorship.
The “ROS” designation allows the property to pass to the surviving
spouse without going through probate. When the first spouse passes, some
add a child to the deed as joint tenants with ROS, with the thought that
this child will then sell the property at the parent’s death and
divide it amongst all the siblings, which is what the trust says should happen.
Unfortunately, the parent’s wishes may not be accomplished in this
scenario. The ROS designation on the deed means that the one child inherits
the property as her own and has no legal obligation to follow the terms
of the trust.
Coordinating the funding of your trust with your overall estate distribution
plan needs to be done with care. Your estate planning lawyer can only
advise you properly if you give them the big picture, i.e., full disclosure
of all of your assets along with copies of deeds, titles, and beneficiary