How should assets be titled and beneficiaries designated?

By Mark Winn

Contributor

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 general objectives people wish to accomplish?

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

OBJECTIVE 2: Maximize the amount that may go to a spouse or loved one “in trust” (pursuant to the terms of a trust) so it avoids estate taxes, protects the assets from most lawsuits (including divorce) and making sure the assets will remain in your family.

In order to accomplish both objectives, the client needs to be informed and advised as to the title or designation on each asset they have.  For example, assume Jerry created a revocable trust and his trust directs all his assets go into a trust for the benefit of his daughter, Mary, and her two children, Liz and Bob (his grandchildren).  The trust directs Mary can get all the income and the principal for her needs.  It also ensures that if the daughter gets sued or divorced, those assets in trust will not be exposed.  This is great planning. 

However, it will not be carried out unless Jerry re-titles his non-retirement accounts into his trust and properly designates the beneficiary on his annuities, retirement accounts, etc.  When an IRA is payable to a trust, so it is protected and will stay in the family, the trust can provide necessary language so the IRS will permit 10 years of tax deferral on the IRA (effectively, a non-spousal rollover).  Let’s say Jerry just had Mary as beneficiary on everything, and that she was joint owner on his assets, too.  If that were the case, probate may be avoided, but none of the assets would legally be directed to go to the trust for Mary’s benefit. 

This frustrates Jerry’s planning goals in OBJECTIVE 2.   Fast forward 15 years and Mary has inherited $500,000 free of trust, and then Mary gets sued for divorce.  Do you think she could lose $250,000, or half of her inheritance, in the divorce?  Yes, she could, especially if the assets became commingled with her spouse.  Would that money be included in her taxable estate for estate tax purposes? Yes, it would.   Would there be any guarantee the funds will stay in the family? No. 

If Jerry had made all his assets payable to his trust or owned in his trust, then the money Mary inherited would be protected from loss in divorce, not subject to estate tax in her estate and guaranteed to go down to Jerry’s grandkids, Liz and Bob.

The moral of this story is that proper titling of assets and coordinated beneficiary designations is 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 and elder law planning attorney. mwinnesq.com