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I don’t know if you’ve ever run out of gas driving down the road. If you have, I’ll bet it was a pretty memorable experience. The closest I’ve come to experiencing that is the time I was driving in some back roads with my younger siblings and blew a tire. Which wouldn’t have been a problem except that we didn’t have a car jack. Being miles from any help, no cell reception, we were good and stranded, unless I could come up with a solution, fast.
Without the right tools and a fully funded trust, your children could be just as stranded in a wilderness of court hearings and legal paperwork. It is easy to make the big mistake of thinking of your estate plan package as a one and done exercise. To work right, your trust needs to properly own your assets. There are two pieces of handling transfers into your trust: Your trust exhibit, which is a handy list for your beneficiaries and evidence of your intent to transfer your assets to your trust, and the actual change of title on your assets.
Your Trust Property Exhibit
Odds are, your attorney spent a fair amount of time going over your assets with you, and preparing a detailed exhibit that sits in the back of your trust. This list is helpful in proving your intent to have your trust own these assets. After your trust is completed, you will likely have many changes to this list over your lifetime. Keeping the exhibit current is something you can easily do by printing off a new Exhibit with a current list. Keep in mind that this list is the least important part of fueling your living trust.
The real work is actually changing the title to assets into the trust. Your attorney should help you with any real estate transfers and have documents to assist you with your other assets. These title changes are what fuels your trust. Without the change in title, your assets are exposed to the probate process – something you definitely want to avoid, and probably your key reason for preparing the trust in the first place.
Real Estate Your real estate is transferred into your trust with a Trust Transfer Deed. There are plenty of ways to mess this up, resulting in “minor” inconveniences like a reappraisal on your tax bill to the title company being unable to issue title insurance. This is definitely something you should not do on your own. Additionally, before transferring the property into the trust, the way you hold title can be adjusted to give you the best tax treatment.
Bank Accounts Bank accounts have an account holder, and the statements they send you every month tells you who is on the account. Adding the bank account to your trust enables the bank account to be included in your overall estate plan, and gives your successor trustee the ability to step into your shoes in the event of your incapacity.
Life Insurance Typically, life insurance is left directly to an individual. There are good tax reasons as well as practical reasons to name your beneficiaries directly. However, there are exceptions, particularly when you have minor children for whom the money is intended. You have several options for your young children, but I believe naming the trustee of your living trust is the best approach. Just remember to change that designation when they are old enough to take the money directly!
Retirement Plans Because of the complex rules and regulations for retirement plans, putting them into your regular living trust is actually a bad idea. It is quite probable that if you do that, you’ll prevent your heirs from being able to “stretch” the retirement account payments over their lifetime. That could cost them thousands in potential tax-free growth in a retirement plan. If you want to help preserve your heir’s ability to “stretch” out the payments and provide creditor protection for your IRA or other retirement accounts, check out the IRA Trust.
Personal Property While your personal property doesn’t have a title, any assets of high value, like artwork or antiques should be listed specifically in the trust exhibit. Additionally, your estate plan should include a general declaration of ownership of personal property by the trust.
Keeping Up With Changes
Where you live, the place you bank, and the things you own are likely to change the fastest over anything else in your estate plan. If you make sure that any new account you open, or new property you purchase is titled in the trust, you’ll find your trust is fully fueled and ready to go when the time comes.
If You’re Stranded…
You may have to be a little more creative. When I found myself stuck in the middle of nowhere with a flat tire and no car jack, I had to take a step back and look at the whole problem. I had a tire iron, so I could get the tire off, but I needed to keep the car up. Fortunately, I was able to find close by a perfectly sized boulder that I could just move under the chassis of the car to hold it up while I dug the tire out, swapped it for the spare, and got us all back on the road and home in time for dinner.
Unfortunately when it comes to the legal system, fixing a problem is a lot more expensive and time-consuming than preventing a problem.
Originally published as “Is Your Living Trust a Lump of Lead or a Fully Fueled Formula One Race Car?“