How should assets be titled and beneficiaries designated?

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Mark F. Winn

When you decide to plan your estate, if you use a revocable trust as a vehicle for transferring your assets to avoid probate, as opposed to a will alone (which ensures probate in almost all cases), then what are the rules that practicing lawyers employ to advise you?

Rule 1: Assets such as life insurance, most annuities, retirement accounts, and other accounts that are payable on death (POD) generally pass in accordance with the designation on file with the life insurance company, the custodian or the financial institution.

So, what controls these assets? Answer: The beneficiary designation. Do assets that are governed by beneficiary designation go through probate? Not if they are payable to a person, persons or to a trust.

Rule 2: Assets that are owned jointly with right of survivorship pass to a surviving joint owner(s) by operation of law.

Rule 3: Assets in a trust are governed by the trust terms. They do not go through probate.

Those are the rules related to what governs the disposition of different asset classes.

Now, what are the general objectives people wish to accomplish?

Objective 1: Avoid unnecessary fees and costs at probate court.

Objective 2: Maximize the amount that might go to a spouse or loved one "in trust" (pursuant to the terms of a trust). Why? To avoid estate taxes, maximize asset protection and keep it in your blood family.

In order to accomplish desired objectives, it is imperative that the client be informed and advised as to the title or designation on each asset class they might have so as to ensure optimal results in their planning.

A simple example illustrates this. Let's say Larry created a revocable trust, and he directs all his assets go into a trust for the benefit of his daughter, Samantha, and her two children, Liz and Bob (his grandchildren).

The trust directs that Samantha can get all the income and the principal for her needs. It also ensures that if she gets sued or divorced, those assets in trust will NOT be exposed.

This is great planning, but not fully effective unless Larry re-titles his non-retirement accounts into his trust and properly designates the beneficiary on his annuities, retirement accounts, etc.

Let's say Larry just had Samantha as beneficiary on everything and that she was joint owner on his assets too.

If that were the case, probate might be avoided, but none of the assets would legally be directed to go to the trust for Samantha's benefit.

Fast-forward 15 years, and Samantha has inherited $500,000 free of trust (because Larry's trust wasn't properly funded), and then Samantha gets sued for divorce.

Do you think she could lose $250,000 - half of her inheritance - in the divorce? You bet she could.

Would that money be included in her taxable estate for estate tax purposes? Yes, it would.

The moral of this story is that proper titling of assets and coordinated beneficiary designations are crucial to the success of any estate plan.

Mark F. Winn, J.D., Master of Laws (LL.M.) in estate planning, is a local asset protection, estate planning and elder law attorney. www.mwinnesq.com

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