You just left your estate-planning attorney’s office, carrying a binder that contains copies of your newly completed estate-planning documents. You feel a sense of accomplishment that you’ve finally accomplished this task. Now you can put the binder someplace safe and know that your intentions will be fully and effectively carried out at your death. Your work is finished, right?
Not necessarily. A common mistake in estate-planning is the failure to title property so that it is actually governed by the terms of your estate-planning documents. Suppose you execute a will and a trust agreement. Your trust agreement only operates on assets owned by the trust (more precisely, by the trustee of your trust). You need to ensure that your property is owned by or payable to your trust, otherwise your trust agreement has no effect upon assets not owned by your trust. Putting your property in trust ownership is referred to as funding your trust.
Ownership is typically determined by how an asset is titled. A bank account titled in the name of Ulysses S. Grant is owned by President Grant individually—not his trust. This type of account would NOT be governed by the terms of President Grant’s trust. A bank account titled in the name of Ulysses S. Grant as trustee of the Ulysses S. Grant Revocable Trust is owned by President Grant’s trust. This type of account WOULD be governed by the terms of President Grant’s trust.
In general, there are two ways for assets to become trust property.
In fact, your attorney probably sent you off with written instructions for how to do this task. For example, President Grant could fund his trust with his bank account by visiting the bank and executing paperwork to change ownership of the account to himself as trustee of his trust.
Otherwise, if you are the sole owner of an asset at your death, and if you leave a will that “pours over” your sole-ownership assets to your trust, then those assets will ultimately pass to your trust after death. This second approach is risky because there are many types of ownership where the property is not subject to your will—and if the property is not subject to your will, then your will cannot “pour over” the asset to your trust.
What Types of Property Ownership are not Subject to Your Will?
Beneficiary Designations: It is common for the owner of an IRA, 401(k), life insurance policy or brokerage account to be asked to designate the beneficiary of the account, who will automatically receive the account at the death of the owner. Property in an account that is subject to a beneficiary designation will not pass under your will or trust unless your estate or your trust is the beneficiary.
Joint with Survivorship Property: Property that is owned jointly by you and another owner, with the “right of survivorship,” will pass automatically to the surviving owner, if you die first. This is a common form of ownership for real property and bank accounts. Property that is jointly owned with right of survivorship will not pass under your will or your trust.
If you have an estate plan, then you should carefully review how your property is titled and whether any property is subject to a right of survivorship or a beneficiary designation. Property should be re-titled in the name of your trust or your trust should be designated as beneficiary, if applicable. Beneficiary designations can be revoked, if they are contrary to your intentions as set forth in your estate-planning documents. Reviewing and changing how your property is titled is absolutely necessary to make sure your intentions are fully carried out.
