Once a living trust is signed, many people believe they will automatically receive all benefits afforded by the trust.  Unfortunately this mistaken belief is all too common.  The following article highlights some procedures necessary for your living trust to work as intended.  First, however, you must understand why you have a living trust.

Avoiding Probate

While there are other reasons mentioned in this article, the most obvious motivation for a living trust is to avoid probate, which is a costly and lengthy court-controlled process of administrating your estate after you die.  All probate actions are public and require letters of notice to invite creditors, potential heirs and other possible claimants to file claims against your assets. To avoid probate, you must correctly transfer your assets to your living trust.  Important steps and procedures are explained below.

Transferring Real Property By Deeds

For real property to avoid probate with a trust, the property must be correctly titled in the name of the trust.  For example: “Mary Jones, Trustee of the Mary Jones Trust dated July 4, 2013”.   If you have a trust, but your home, vacation or rental property is still titled in your name without reference to the trust, your heirs may have to go through probate.  The trust transfer deeds must be signed and notarized.  However, your successor trustee can record them years later, after you die, provided the deeds can be located.  Often it is not critical for the deeds to be promptly recorded, but the safest approach is to record them right away, particularly if you anticipate a possible challenge to your estate plan by an heir or other potential beneficiary.  After you have created your living trust, you must take care to transfer later acquired properties into the trust.  Sometimes this can be done for free by requesting the escrow instructions to require title to vest in the name of the trust.  If, however, your lender requires you to initially take title in your name, a trust transfer deed can be prepared and executed right after the close of escrow.  In any case, be sure to notify any insurance providers regarding change in title to your property, particularly if the name of your trust is different from your name.

Importance of Transferring Your LLC to Your Living Trust

If your LLC is not owned by your living trust, then the LLC and all of its assets will require probate, the first few weeks or months of which your heirs may have no legal power to manage the property.  This can be a disaster for your beneficiaries, particularly if your tenants are not cooperative.  If you already have an LLC at the time your trust is created, then an LLC Assignment & Transfer of Membership Interest must be executed to transfer the ownership of the LLC to your trust.  Again, this is important because, in the event of your death or incapacity, there will be an immediate need to manage your rental property business, legally enforce timely tenant rent payments and handle banking transactions.  If you already have a living trust at the time your LLC is created, it is usually best to have your trust form the LLC, so that the trust is the owner upon the LLC’s inception.  All in cases, extreme care must be exercised to avoid reassessment of property taxes by utilizing all available exemptions under CA R&T 11923 and R&T 11925, Rev. & TC Sec. 63 and Code Section 62, and PropsTransferring Bank & Financial Accounts

Most accounts should be re-titled to the name of your trust.  In this way, your successor trustee can access your accounts to pay your bills, handle your financial affairs, and eventually distribute money to your beneficiaries.  Financial account transfer letters can be prepared by your attorney so that your request to the bank can be streamlined, without the need to address an array of confusing questions from the bank.  In most instances, these accounts should continue to use your social security number, the number which should be provided when the bank asks for the EIN (Tax ID Number) for the trust.  While the title of the bank account (and your monthly statement) will change to your trust, it is not necessary for you to change the name on your checkbook.  For enhanced privacy, some people prefer their checks printed to show only their name and without reference to the trust, while others prefer the trust name only and not their individual name.

Beneficiary Designations & Tax Deferred Accounts

Regarding life insurance policies, for most individuals it is not necessary to change the title owner.  The best approach is usually to change only the beneficiary(ies).  For example, you can name your living trust as the beneficiary, so that when you pass, the life insurance proceeds will be distributed to the trust, and then to the beneficiaries of your trust in the manner you have designated.  Or, you may wish to name your spouse or another relative as the primary beneficiary, and then name your living trust as the alternate/contingent beneficiary.  It is worth noting that some individuals may be able to attain certain asset protection and estate tax planning benefits by changing the title owner of the policy.  However, this approach is beyond the scope of this article.

As for tax deferred accounts, such as IRAs/401(k)s, etc., you should generally not change the title owner, but only the beneficiary(ies).  If you change the title owner on your tax deferred retirement account, it may be treated as an early withdrawal by the IRS, subjecting the funds to present inclusion as taxable income. A better approach might be to name your spouse as the primary beneficiary.  As for the contingent beneficiary, you could name an individual or your trust.  In some cases, the trust as primary beneficiary may be a great idea, but not always.  For example, you should determine if the IRA can be rolled over to an heir.  It may be possible to transfer the IRA to an eligible child who may desire to continue the tax deferred status, rather than cashing out.

Making a Decision After the Death of a Spouse

Trusts can be drafted to require, or give the surviving spouse the option, to split the trust into an A-B, and/or C portion.  In accordance with the terms of the trust, if the surviving spouse does not act in a timely manner and fund these B and/or C sub-trusts, the ability to do so could be lost.  The A-B and/or C trust split after the death of a spouse may be highly beneficial for reducing estate taxes, asset protection, and/or protecting beneficiary interests.  On the other hand, smaller estates could suffer from a loss of step-up in tax basis on the appreciation occurring between the death of the first spouse and that of the surviving spouse.  Therefore, the decision should not be overlooked.  If the trust is set up as an optional disclaimer A-B trust, the surviving spouse’s decision is conveniently postponed until after the death of the first spouse, when estate tax rates, exemptions, values, portability, and other matters may be better ascertained.  In some cases, a Section 2518 disclaimer and/or Form 706 must be timely filed.

With budget cuts, courtroom closures, and ever increasing delays and costs, it has become all the more important to ensure that your estate will avoid probate.  Also, proper management of your living trust helps ensure your estate will not have to pay unnecessary taxes.

Michael K. Elson is a prominent estate planning, wills and trusts attorney. He is the principal of The Law Offices of Michael K. Elson, located in Encino, which provides estate, business and asset protection planning, including trusts, LLCs, corporations, probate, and trust administration.  He may be reached at (818) 763-8831 or by visiting http://www.LimitLiability.com

 

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