Probate is defined as the court managed process by which an estate is administered to beneficiaries and heirs. The probate process is long and sometimes costly, and thus it is largely recommended that persons and families with over $150,000 in assets set up a trust. A living trust will avoid probate, so long as all assets are placed into the trust.
However, if one fails to add assets to the trust, these assets will still have to go through probate. Many well intentioned people create a trust, but leave them unfunded for one reason or another. Simply having a trust, as I stated before, will not avoid probate. So, let’s address how to fund a trust.
A living trust has five categories that can be funded. Real property, Bank and Brokerage accounts, Life Insurance Policies, Tangible Personal Assets, and Retirement accounts.
REAL PROPERTY
Real property, by definition, is property that is fixed in place. Most often this is a building or a piece of land. Real property ownership is designated by a deed. Each county in California maintains a database on real property ownership. Contra Costa County and Alameda County have public databases where the deeds to all property held in each county are recorded. When a trust is formed, the owner listed on the deed must change from the name of the person to the trust. So, if Jonathan Williams owns a house, and the house is in his name, he must transfer the deed into the trust, making the “Living Trust of Jonathan Williams” the new owner. This must then be registered with the county in order for the trust to be “funded.”
BANK AND BROKERAGE ACCOUNTS
There are more than a few ways to ensure bank accounts and investment accounts can be accessed by beneficiaries and heirs when you die. You could have a joint account, POD (pay on death) instructions with the bank/brokerage, or a co-signer. These methods work if you are happy for the person listed to get all the money, and have thus specified so in your will. In most cases, however, you will want the funds to go to multiple persons or organizations. Putting the accounts in the name of the trust will ensure that funds can be transferred easily to all parties specified by the documents of your estate plan. Each bank and brokerage has a procedure for this, and can assist with transferring the account name to that of the trust. Consult with your Trust Attorney if you need additional assistance.
LIFE INSURANCE
The safest way to protect life insurance proceeds is to name your trust as the beneficiary of the policy. When you apply for life insurance, you are required at that time to name a beneficiary, and often a secondary beneficiary. However, should anything happen to your beneficiaries, or in the case that one is a minor, the insurance funds will have to go through the probate process. If your trust, on the other hand, is the beneficiary, the funds can be distributed easily, as directed by the trust. The cost and headache of probate can thus be avoided. Making your trust the beneficiary of your life insurance policy is typically a simple and easy process which you insurance agent or trust lawyer can assist you with.
RETIREMENT ACCOUNTS
Retirement accounts will typically specify a designated beneficiary, should anything happen to the primary account holder. For married couples this is often one’s spouse. Where retirement accounts can get tricky is in naming their alternate beneficiary. One’s trust is often a very valid choice for this secondary spot. While in some situations, having the accounts go to the trust can create an additional tax burden (through RMD, or required minimum distribution upon death), in most cases it will not. And thus, having one’s retirement account go to the trust, to be distributed according to trust specifications, can be a safe way to avoid probate and ensure your assets are given to the heirs of your choosing. Your financial planner and estate planning attorney should be consulted with before making this decision.
TANGIBLE-PERSONAL ASSETS
Tangible assets such as jewelry, artwork, and furniture can be a little trickier when it comes to placing them in your trust. When an item has no formal title or registration, it can be placed in a trust through a deed of gift or a bill of sale. A deed of gift is often used to describe general categories of items that are given to the trustee, as opposed to specific items. The deed of gift or bill of sale is necessary to “fund” the trust with said items. A list of items with beneficiary names that is simply attached to trust documents does not qualify those items to be included in the trust. If the items are high in value, such as jewelry or artwork, they will have to go through probate if not properly placed in the trust. I recommend speaking with an experienced trust lawyer about whether or not your items should be included in your trust, or are okay to be simply divided up by your will.
Trust law can be complicated. I recommend speaking with an attorney who specializes in Estate Planning and Trust Administration in your state. I specialize in Trust Law in Contra Costa County and Alameda County and am happy to offer a free 30 minute consultation to residents in Walnut Creek, San Ramon, Pleasant Hill, Danville, Lafayette, and the surrounding areas.