To avoid probate and its delays and expenses, a person must take deliberate steps to transfer property to a living trust once it has been created. This includes brokerage accounts with stocks and bonds, bank accounts, shares of a closely held business, and real estate. Sometimes designating a living trust as beneficiary or contingent beneficiary of life insurance and retirement accounts is a wise move as well (depending on the circumstances).
You must transfer property to a living trust while you’re alive in order to avoid probate upon your death.
Insurance News Net recently published an article, “Funding your trust and avoiding probate,” that explains that your will probably leaves everything to your trust. However, wills must pass through probate (which is a court process that is lengthy, public, and expensive in California). As a result, proper estate planning includes a process to transfer property to a living trust after it has been signed. If the assets aren’t titled in the name of the trust, those assets will likely have to be probated, unless they are within the dollar limits of any applicable state small estate statute.
The process to transfer property to a living trust depends on the type of asset involved. Real estate is transferred to a trust by preparing and recording a new deed. Brokerage and bank accounts are re-titled into the trust through the financial institution’s change of ownership forms.
Some assets, however, should not be transferred to a living trust during your lifetime. These assets include IRAs and your 401(k) or 403(b), and life insurance. Instead of being transferred to the trust during your lifetime, they pass directly to the beneficiaries who were designated by the owner at the time the account was started or by a subsequent change that the owner made.
In some circumstances, as noted above, the owner of those types of accounts will name their trust as the beneficiary. This can be ideal for life insurance, because the death benefits are income tax free, and the trust can provide asset protection for the death benefits if it’s drafted accordingly. That said, review the terms of the life insurance contract to be sure that if the trust is named as a primary beneficiary, that you won’t be forfeiting certain riders the policy would otherwise include.
Regarding retirement accounts such as IRAs, or your 401(k) or 403(b), there are some tax considerations to understand before naming a trust as the beneficiary. For one thing, by naming a trust instead of a spouse (if applicable) you lose the ability for the surviving spouse do do a spousal rollover. Furthermore, some trusts don’t allow the retirement account to be stretched for continued tax deferral. Therefore, make sure your living trust attorney knows the language to include in the trust document to allow for the maximum deferral of taxation under the law if you’re considering naming a trust as beneficiary of a retirement account.
If you’ve just prepared your living trust, or did so many years ago but haven’t reviewed your assets for a while, talk to your estate planning attorney about how to transfer property to a living trust so that your estate plan actually works as you intend.
Reference: Insurance News Net (June 30, 2019) “Funding your trust and avoiding probate”