Keeping Financial Assets Current with Estate Planning

People are often think that establishing a living trust and signing a power of attorney is all that they need to do to control their assets in the event of incapacity and eventual death. This can be a costly misunderstanding. It is necessary to retitle assets to the living trust and to update designation of death beneficiaries to Pay on Death (“POD”) Bank Accounts and Transfer on Death (“TOD”) brokerage accounts or else, preferably, retitle such assets to the trust (except retirement accounts). Let’s discuss some scenarios.

Consider a settlor of a living trust who declares various brokerage accounts to be trust assets on the trust asset schedule. These accounts may have designated death beneficiaries named on old death beneficiary forms who are no longer the owner’s intended death beneficiaries. Unless the account owner either retitles these accounts to her living trust or signs a new designation of death beneficiary form these accounts will pass according to the old death beneficiary form; not what the settlor intended when she declared these on the trust asset schedule.

Next, consider a settlor of a trust who owns an interest in real property in California or elsewhere in the US but does not retitle the ownership interest to his or her living trust. An unintended and undesirable outcome is possible.

That is, if the property is held in joint tenancy with a co-owner, usually a spouse, then the surviving joint tenant (spouse) will inherit the deceased joint tenant’s interest, depending on who dies first. Such joint tenancy scenarios are common place between spouses and domestic partners, and less common between parent and child.

However, when such relationships involve step children one or the other joint tenant may wish to sever the joint tenancy by transferring their interest into a separate living trust in order to ensure that their own children eventually inherit their interest in such property.

Moreover, if the ownership interest in real property is not in joint tenancy but is held individually, then such ownership risks the possibility of an unnecessary probate. For example, consider a couple that creates a joint living trust and transfer their co-owned real properties into the living trust, but omit the husband’s interest in his sole and separate real property that the husband inherited or purchased prior to the marriage. When the husband dies the surviving spouse will need to probate the husband’s will because the property is not the deceased husband’s primary residence; which in California now avoids probate through a petition to determine succession to a decedent’s primary residence.

Typically such a probate will result in the husband’s assets outside of the trust being transferred into the husband’s living trust, for further administration. In such a situation, the husband would have done well to either create a separate trust for the husband’s sole and separate property that he wants to keep separate from the assets in the husband and wife joint trust because he intends to leave the asset (or its proceeds) to different beneficiaries.

Furthermore, bank and brokerage accounts excluding retirement accounts which can never be owned by a trust, are usually best held inside of a trust to be managed by the trustee if and when the account owner is incapacitated. Otherwise, the account owner is relying on his or her agent under a power of attorney (if any) to manage such non assets. Unless the power of attorney is current, appropriately drafted, and acceptable to the financial institution this situation might lead to otherwise avoidable court proceedings but for the trust not owning these assets.

The reasons why assets are not retitled to the trust are varied, but include the following: the asset was refinanced and taken out of the trust; new assets were purchased outside of the trust; or the asset was deliberately kept or inadvertently left outside the trust. Whatever the reason, it is best to be aware of the situation and act appropriately.

The foregoing is not legal advice.  Consult a qualified estate planning attorney for guidance. Dennis A. Fordham, Attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at Dennis@DennisFordhamLaw.com and 707-263-3235.