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 for the account.
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 life insurance beneficiary designation only names one of your children? Under Arizona law, what’s on the beneficiary designation controls. 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 among 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 his or 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 him or her the big picture, i.e., full disclosure of all of your assets along with copies of deeds, titles and beneficiary designations.