This is a story we hear all too often —
“Mom and dad created a revocable living trust. They wanted to avoid probate. You see my sister lives in a group home because she is developmentally disabled. The trust named me as trustee, and my sister’s share goes into a special needs trust. I just discovered they named all of us kids as beneficiaries on their IRAs, and the house wasn’t transferred into the trust. What do I do?”
Simply put, you have some troubles. Some, more troublesome than others, in fact:
1. Not transferring assets to the trust (like the house) means that the probate avoidance value of the trust is lost altogether. In Utah, we will have to file a probate proceeding to transfer the house to the trust — and then it can be distributed properly. The good news is that those assets they DID transfer into the trust won’t be subject to the probate proceeding. The bad news: there will still have to be a probate proceeding. Your parents failed in their goal to avoid probate. In Utah that’s not the end of the world. Our probate system is very user friendly and not excessively expensive, and it is simple if that’s the only asset that we need to deal with (assuming your parents also signed a good “pour-over Will”.
2. The IRA beneficiary designations create a different difficulty, one that is difficult to overcome. The other kids will get their share of the IRA just fine, even though your parents didn’t use the trust. But your sister’s share will go outright to her and will cause her to lose her eligibility for at least some public benefits — and we will probably have to have a court proceeding (in Utah, a conservatorship) to appoint someone with the legal authority to receive and manage her inherited IRA. Plus, we may have to have a related court proceeding to set up a special needs trust (we can’t use the one that your parents created) to receive those funds — and if we do, any proceeds remaining in that trust when your sister dies, will first have to be used to pay back the State for any benefits it provided. In other words, your parents failed in their goal to provide protection for your sister’s inheritance. We can protect it for her benefit, but at her death the State has claim to all or part of the remainder.
How did this happen? Didn’t the creation of the trust address both kinds of problems?
No. Creation of the trust was one thing. Funding of the trust is another.
“Funding” is the term lawyers usually use to describe all the different kinds of things that have to be done to get assets titled in the name of a revocable living trust. It is an essential part of the process, and usually is part of the job taken on by the lawyer who drafted the trust. Not every lawyer agrees, but we at ASTILL LAW FIRM, feel that we have not completed our job unless we have at least initiated the process of getting assets transferred to the trust. The practical effect: even after you sign your estate planning documents, you may still be working with our office for weeks or months to get the “funding” done.
Some assets are fairly easy. The house title (at least for Utah properties) is easy for us to prepare. If there is out-of-state real property, we may need to involve a lawyer from the state where the property is — but even that is usually a fairly modest cost. A lawyer in, say, Indiana might transfer Indiana property to the Utah trust at a low cost, hoping that we will return the favor the next time she has a Utah property to transfer into an Indiana trust (we probably will).
Other assets can be more complicated. Your bank, credit union or brokerage house may resist changing accounts into the trust’s name. Some may flat out refuse. Some will appear to have done it right, but then later decide that the title hasn’t actually been changed at all (and they may not tell us).
Then there are the assets that get changed after the trust is signed. If you have refinanced your home mortgage, or purchased a certificate of deposit from a new financial institution, or talked to your “personal banker” about accounts, you might well have signed new title documents. You often will not even realize that that is what you were doing — no one ever says: “you know, if you sign this document it might just mess up your trust funding — you should talk with your estate planning attorney first.” We wish they would say just that.
Some assets get overlooked. Did you remember that you inherited a 5/24 interest in some oil and gas rights in Texas? Did you tell us about the small bank account you kept in your hometown bank when you moved to Utah 23 years ago? Did you even remember that you had a life insurance policy from your time in the military at the end of World War II?
Then there are the beneficiary designations. Life insurance, IRAs and other retirement accounts and annuities almost always have them. Bank and brokerage accounts and, in Utah and a handful of other states, even real estate can have them. Our clients are forever tinkering with them — you go to a seminar, or listen to the bank manager explain the value of annuities, or talk to a tax preparer who assures you that lawyers are overpriced, and then the beneficiary designation gets disconnected from the rest of your estate plan.
Don’t panic. The problems can usually be solved, it just might not be as smooth as you hoped, or in the manner your parents intended.
It would be best, of course, if we could get things right while you’re still alive. Haven’t met with your lawyer in five years? Make an appointment, gather up all the statements, titles and beneficiary designations you can, and sit down to review the funding of your trust. Not every beneficiary designation should name the trust in every situation. Not every account will actually be held the way you believe it is, or the way your lawyer believes it should be.
Even if you don’t get it straightened out while you’re still alive, there may be things your heirs can do. In Utah, up to a total of $100,000 can be collected into your trust without having to do a full-blown probate (not including real estate). There are rules and limitations, but many problems of failure to fund trusts can be taken care of through those provisions of law. Not in Utah? We don’t know for sure (we don’t practice in your state), but there are similar rules in most, perhaps all, states.
Don’t worry, your lawyer here at ASTILL LAW FIRM and our staff are great to work with and we will help solve your problems. But you can see that some problems, though solvable, may not result in solutions intended by the Trust Grantors. Come see us before it’s too late!