How Should Assets Be Titled? Beneficiaries Designated?

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 practicing lawyers employ to advise you?

     RULE 1: Assets such as life insurance, most annuities, retirement accounts, other accounts that are payable on death (P.O.D), generally pass in accordance with the designation on file with the life insurance company, the custodian, or the financial institution. So, what controls with 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      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 may 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 may have so as to ensure optimal results in their planning.

A simple example illustrates. Let’s say Dad created a revocable trust and he directs all his assets go into a trust for the benefit of his daughter and her two children (his grandchildren). The trust directs she 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 but not effective unless Dad re-titles his non-retirement accounts into his trust and properly designates the beneficiary on his annuities, retirement accounts, etc.

Let’s say Dad just had daughter as beneficiary on everything and that she was joint owner on his assets too. If that is the case, probate may be avoided but none of the assets would legally be directed to go to the trust for the daughter’s benefit. Fast forward 15 years and daughter had inherited $500,000 free of trust (because Dad’s trust wasn’t properly funded) and daughter gets sued for divorce. Do you think she could lose $250,000 or 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. Moral of the story: Proper titling of assets and coordinated beneficiary designations is crucial to the success of any estate plan.

Contributed to Bluffton Sun by:
Mark F. Winn, J.D., Master in Estate Planning, a local tax, asset protection and estate planning attorney. Submitted for September 18, 2012 publication in Bluffton Sun and Hilton Head Island Sun