For those new to estate planning, there can be great misunderstanding as to what your living trust will own. Often, people think that a living trust will own “all my assets.” Some think that a living trust avoids probate (“no matter what”).
Legally, however, a living trust rarely owns all of your assets. For example, a living trust will never be the owner of your IRA, SEP IRA, 401(k), 403(b), or other pension plan. Instead, you (the individual) must be the owner, with those you name as your primary or secondary beneficiaries inheriting on your death. If you become unable to manage your financial affairs, these income tax sensitive assets should be managed by your durable general power of attorney (not the trustee of your living trust).
In California estate plans, the living trust is normally created to own your “after income tax” assets, such as your real estate, bank accounts, stock (not held in an IRA or pension plan), etc. But in order for the trust to own these assets, and thereby avoid probate, the legal title to the assets should be registered properly in the name of the trustee of the trust, with the name and date of the trust included.
Hence, simply writing a living trust does not place your home, cash, and stock in the trust. Rather for those assets to be held in the trust (and to receive the tax and probate avoidance and control benefits of the trust), you need:
- The deed recorded to change from your name to the proper name of the trust.
- The stock certificate or stock account changed from your name to the proper name of the trust.
- The bank accounts changed from your name to the proper name of the trust.
Too often, probate is required on death because such “after income tax” assets were not titled (or registered) in the name of the living trust.
And sometimes probate is required on IRA, SEP IRA, 401(k), 403(b), or other pension plan because either the person never named a beneficiary for those “pre-income tax” assets or because all of those who were named were deceased.
A thoughtful California living trust plan normally includes all of the following:
- The living trust (with assets to be owned by it actually transferred properly to the trustee of the trust).
- A durable general power of attorney for management of non-trust assets, such as IRA, SEP IRA, 401(k), 403(b), or other pension plans.
- Change of beneficiary forms completed on IRA, SEP IRA, 401(k), 403(b), or other pension plan, as well as life insurance and annuities.
- An advance health care directive.
- A so-called “pour over will.”
- A letter of instruction and advice.
Copyright James J. Phillips 11/28/15