Have you properly funded your revocable trust?

If your estate plan includes a revocable trust — also known as a “living” trust  or a “revocable living trust”— it’s critical to ensure that the trust is properly funded. Revocable trusts offer significant benefits, including asset management (in the event you become incapacitated) and probate avoidance. But these benefits aren’t available if you don’t fund the trust.

We consistently see clients who come to our practice with nice, shiny, thick binders containing their revocable living trusts and other estate plannings, and our usual first question is “what do you have titled in the trust?”  The blank stares coming from the clients can be disconcerting.   They have spent considerable time and money developing the documents, yet nothing has been moved into the trusts.  By failing to move assets into the trust, the administration of the estate will be more costly and less time efficient–this is because probate would generally be necessary to transfer title to your assets.

The basics

A revocable trust acts as a will substitute, although you’ll still need to have a short will, often referred to as a “pour over” will. The trust holds assets for your benefit during your lifetime.

You can serve as trustee or select someone else. If you choose to be the trustee, you must name a successor trustee to take over as trustee upon your death, serving in a role similar to that of an executor.  The successor trustee will manage the administration of your estate after your death ensuring that your bills would be paid and your assets are distributed according to the terms of your trust.

Essentially, you retain the same control you had before you established the trust. Whether or not you serve as trustee, you retain the right to revoke the trust and appoint and remove trustees. If you name a professional trustee to manage trust assets, you can require the trustee to consult with you before buying or selling assets.

The trust doesn’t need to file an income tax return until after you die.  Instead, you pay the tax on any income the trust earns as if you had never created the trust.  The trust will use your Social Security Number to set up accounts while you are alive instead of obtaining a separate tax identification number.

Asset ownership transfer

Funding your trust is simply a matter of transferring ownership of assets to the trust. Assets you should transfer include real estate, bank accounts, certificates of deposit, stocks and other investments, partnership and business interests, vehicles, and personal property (such as furniture and collectibles).

Certain assets shouldn’t, however, be transferred to a revocable trust. For example, moving an IRA or qualified retirement plan, such as a 401(k) plan, to a revocable trust can trigger undesirable tax consequences. And it may be advisable to hold a life insurance policy in an irrevocable life insurance trust to shield the proceeds from estate taxes.  This does not mean, however, that sub-trusts under the revocable trust cannot be named as beneficiary of your qualified retirement plans or life insurance proceeds.  To the contrary, such trusts can be named as the beneficiary; note, however, that special language is required in the trust to ensure the most favorable tax treatment when it comes to qualified retirement plans.  A qualified estate planning attorney should generally be engaged to make sure that proper drafting is achieved–most “self help” websites and software will not properly cover this issue.

Don’t forget to transfer new assets to the trust

Most people are diligent about funding a trust at the time they sign the trust documents. But trouble can arise when they acquire new assets after the trust is established. Unless you transfer new assets to your trust, they won’t enjoy the trust’s benefits.

To make the most of a revocable trust, be sure that, each time you acquire a significant asset, you take steps to transfer it to the trust. If you have additional questions regarding your revocable trust, we’d be happy to answer them.

© 2017

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Worried about challenges to your estate plan? Make it “no-contest”!

Estate planning is all about protecting your family and ensuring that your wealth is distributed according to your wishes. So the idea that someone might challenge your estate plan can be disconcerting. One strategy for protecting your plan is to include a “no-contest” clause in your will or revocable trust (or both).

Our firm, Hill & Watchko, uses these clauses as a matter of regular practice.  Unless the client expressly directs us to remove the no-contest clause, it will appear in our Wills and Revocable Living Trusts.  We firmly believe in the right of our clients to leave their property to whomever they choose and in the proportions that they want.  The no-contest clause can help carry this out.

What’s a no-contest clause?

A no-contest clause essentially disinherits anyone who contests your will or trust (typically on grounds of undue influence or lack of testamentary capacity) and loses. It’s meant to serve as a deterrent against frivolous challenges that would create unnecessary expense and delay for your family.

Most, but not all, states permit and enforce no-contest clauses. And even if they’re allowed, the laws differ — often in subtle ways — from state to state, so it’s important to consult state law before including a no-contest clause in your will or trust.  Georgia law allows for such provisions.

Some jurisdictions have different rules regarding which types of proceedings constitute a “contest.” For example, in some states your heirs may be able to challenge the appointment of an executor or trustee without violating a no-contest clause. And in some states, courts will refuse to enforce the clause if a challenger has “probable cause” or some other defensible reason for bringing the challenge. This is true even if the challenge itself is unsuccessful.

Are there alternative strategies?

A no-contest clause can be a powerful deterrent, but it’s also important, wherever you live, to design your estate plan in a way that minimizes incentives to challenge it. To avoid claims of undue influence or lack of testamentary capacity, have a qualified physician or psychiatrist examine you — at or near the time you sign your will or trust — and attest in writing to your mental competence. Also choose witnesses whom your heirs trust and whom you expect to be able and willing to testify, if necessary, to your freedom from undue influence. Finally, record the execution of your will.

Of course, you should also make an effort to treat your children and other family members fairly, remembering that “equal” isn’t necessarily fair, depending on the circumstances.

The provisions do not work if you exclude someone from the Will or Trust

The no-contest provisions are helpful and should be very strongly considered for inclusion in your estate plan, but those provisions are only enforceable against someone who is named in the document to receive an asset.  If you were to simply exclude a person expressly in the document, there is no incentive for that person not to file a challenge to the document in court.  They have already been cut out so they have “nothing to lose” by lawyering-up and trying to blow up the estate plan.

What to do?

One method is to give a cash bequest to the person you seek to otherwise exclude, thereby making him or her subject to the no-contest provision. The cash bequest would need to be significant enough to make him or her seriously consider whether hiring a lawyer and incurring litigation costs and chancing losing the bequest is worth it.

Protect yourself

As you develop or update your estate plan, it’s important to think about ways to protect yourself against challenges by disgruntled heirs or beneficiaries. We can help you determine if a no-contest clause can be an effective tool for discouraging such challenges.

 

 

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