Law News and Tips

Charlie’s Choice

Fred Vilbig - Monday, November 23, 2015

I clearly remember Charlie as he was leaving my office that day. He had just signed his trust, and I’d asked him if he wanted any help re-titling his assets into his name as trustee. With a twinkle in his eye, he smiled and said, “Don’t worry. I’ll take care of it,” and he walked out my door.

Maybe three years later, Charlie’s granddaughter called. Charlie had died as a result of a boating accident. Actually, it was a rafting accident. In March, while testing a raft on which he and some buddies were going to float down the Mississippi, a la Huckleberry Finn, he had fallen into Mark Twain Lake, caught pneumonia, and died. Charlie and his buddies were in their 80s. He certainly knew how to live life.

Charlie had named his granddaughter as his successor trustee. I started to explain to her what was involved in administering a trust. I was talking about having to prepare a list of assets to start an inventory, and she interrupted me. She said Charlie hadn’t done any of that stuff.

I was confused. She explained that Charlie had never funded this trust by re-titling his assets into his name as trustee. She told me he’d said that if he funded this trust, he felt that he would be telling God he was ready to die. Charlie wasn’t ready to die, so he hadn’t done anything. Now, everything needed to be probated.

Creating a trust is only the first part of a trust-based estate plan if one of your main goals is to avoid probate (which it almost certainly would be). Unless you also retitle your assets in your name (or in the case of a husband and wife, names) as trustee(s), the assets in an individual’s name at his or her death will have to go through probate.

So what’s involved in retitling assets into your trust?

There are two ways to transfer assets into a trust. Several years ago the Missouri legislature passed a law that allows you to just designate the trust, such as the “Betty Smith Trust.” Maybe I’m being too formal or old-fashioned, but I don’t like to do that.

You see, trusts do not technically “exist” like a corporation or an LLC. A trust is a contractual relationship between the person making the trust (the “grantor”), the person holding the trust property (the “trustee”), and the person for whom the trust assets are being held (the “beneficiary”). Under the law, the same person can be all three of these people, but it doesn’t have to be that way. So although you can name the trust, per se, as the owner, I think the better practice is to name the individual trustee as the asset owner.

We generally recommend that some assets be transferred directly into the trust. Investments and savings accounts fall into that category. Checking accounts may or may not be put directly into the trust, depending upon whether the grantor(s) is/are single or married.

The trustee should be named as the beneficiary for other assets. Use a beneficiary deed for your house and other property to make financing easier. Use a transfer-on-death (a “TOD”) beneficiary designation on your car to avoid problems with your lender and to simplify things with the license bureau. The beneficiary on life insurance should be the trustee (as trustee, of course) to avoid probate in case the grantors die close together in time. Name the trustee as the primary or contingent beneficiary of an IRA (yes, the IRS allows this under certain circumstances) to avoid accelerating the tax on your IRA assets.

You can also avoid probate by naming individuals as either joint owners or as direct beneficiaries, but this defeats the purposes of the trust and creates other problems as I have discussed in other articles.

The moral of the story is to avoid problems, fund your trust. Otherwise, you may end up paying your attorney more than you intended.
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