How do you keep assets out of probate? If that estate planning question is on your mind, you should know that there are two basic ways to accomplish that objective.
One, you could create a revocable living trust. You can serve as its trustee, and you can fund it by retitling certain accounts and assets into the name of the trust. A properly written and properly implemented revocable living trust allows you to have complete control over those retitled assets during your lifetime. At your death, the trust becomes irrevocable and the assets within it can pass to your heirs without being probated (but they will be counted in your taxable estate). In most states, assets within a revocable living trust transfer privately, i.e., the trust documents do not have to be publicly filed.
If that sounds like too much bother, an even simpler way exists. Transfer-on-death (TOD) arrangements may be used to pass certain assets to designated beneficiaries. A beneficiary form states who will directly inherit the asset at your death. Under a TOD arrangement, you keep full control of the asset during your lifetime and pay taxes on any income the asset generates as you own it outright. TOD arrangements require minimal paperwork to establish.
This is not an either/or decision; you can use both of these estate planning moves in pursuit of the same goal. The question becomes: which assets should be transferred via a TOD arrangement versus a trust?
Many investment accounts can be made TOD accounts
Originally, that was not the case – for decades, only bank accounts and certain types of savings bonds could pass to beneficiaries through TOD arrangements. When the Uniform Transfer on Death Security Registration Act became law in the 1980s, the variety of assets that could be transferred through TOD language grew to include certificates of deposit and securities and brokerage accounts.
Many investment & retirement savings accounts are TOD to begin with
Take IRAs and workplace retirement plans, for example. In the case of those assets, the beneficiary form legally precedes any bequest made in a will.
The beauty of the TOD arrangement is that the beneficiary form establishes the simplest imaginable path for the asset as it transfers from one owner to another. The risk is that the instruction in the beneficiary form will contradict something you have stated in your will.
One common situation: a parent states in a will that her kids will receive equal percentages of her assets, but due to TOD language, the assets go to the kids not by equal percentage but by account, with the result that the heirs have slightly or even greatly unequal percentages of family wealth. Will they elect to redistribute the assets they have inherited this way, in fairness to one another? Perhaps, and perhaps not.
Placing valuable property items into a living trust makes sense
Real estate, ownership shares, precious metals, pricy collectibles such as fine art, classic cars, antiques, and rare stamps and coins – these are all worthy candidates for inclusion in a living trust. If your net worth happens to run well into the millions, these assets may constitute the bulk of it, and a trust offers a degree of protection for such assets that TOD language cannot. A trust also allows you to name a successor trustee, which TOD language cannot do for you.
A “pour-over” will usually complement a revocable living trust
As your net worth will presumably keep growing after the trust is implemented, a “pour-over” may be used to allow your executor to “pour over” assets not already in the trust at your death into the trust. That will mean added privacy for those assets in most states – but the downside is that these “poured-over” assets will be subject to probate.
Of course, you can add and subtract from the original contents of a revocable living trust as you wish during your lifetime – you can remove assets retitled into it when it was originally created and retitle them again in your name, you can “pour in” new assets, and you can sell or give away specific assets in the trust.
Is it ever wise to name a trust as the beneficiary of a retirement account?
Under three circumstances, it might be worth doing. If you worry about your heirs rapidly spending down your IRA assets, for example, naming a trust as the IRA beneficiary more or less forces them to abide by a stretch IRA strategy. Are there “predators and creditors” who want some of your net worth? That is another reason to consider this move. If you want to leave your retirement account assets to someone who is currently a minor, this idea may be worthwhile as well.
How complex should your estate planning be?
A conversation with a trusted legal or financial professional may help you answer that question, and illuminate whether simple TOD language or a trust is right to keep certain assets away from probate.
About the Independent Financial Advisor
Robert Pagliarini, PhD, CFP®, EA has helped clients across the United States manage, grow, and preserve their wealth for the past 25 years. His goal is to provide comprehensive financial, investment, and tax advice in a way that was honest and ethical. In addition, he is a CFP® Board Ambassador, one of only 50 in the country, and a real fiduciary. In his spare time, he writes personal finance books, finance articles for Forbes and develops email and video financial courses to help educate others. With decades of experience as a financial advisor, the media often calls on him for his expertise. Contact Robert today to learn more about his financial planning services.