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How to handle your financial accounts after you establish a living trust

How to handle your financial accounts after you establish a living trust

People often believe that they must change the name on their bank accounts as part of establishing their living trust. However, “changing” the owner of a personal bank account actually means closing the account and opening a new one in the new owner’s name. If you have ever opened a new bank account, then you know the common headaches that accompany the new account: ordering new checks, holds on deposits, and so on.

Actually, you can keep your current accounts, and name your trust as a “pay on death” (“POD”) or “transfer on death” (“TOD”) beneficiary. Under California law, if an account has a POD designation, then when the account owner dies, the POD payee automatically becomes the new owner of the funds on deposit, without having to go to probate court.

Now, if you want to open new accounts in the name of your trust, you can certainly do so, or (as noted above) you can open new accounts in your own name and use the pay on death beneficiary designation method described above.

Name whoever you like (spouse, children, and so on), and then name your trust as a backup, just in case. Since trusts do not die, the financial institutions will always have a surviving POD payee to whom the money will be turned over. Also, you may want to name your trust as the primary POD payee on at least one account, so the person named to wind up your affairs will have access to money right away, to pay final expenses and administrative costs.

Real estate issues that come up after you establish a living trust

Even with a trust, people are often confused about what they may need to do regarding their real estate. Apart from ensuring that the real estate you own is deeded into your trust, there are some common, recurring issues that can arise with real property.

Refinancing​ — If you refinance, and your lender makes you take your property out of your trust, then tell your mortgage broker or loan officer, and your escrow officer, that you want a deed ​and​ (for California property) a Preliminary Change in Ownership Report (“PCOR”) prepared to place the property back into your trust, which you will sign when you sign your loan documents. Often, the title company handling the refinance will record the deed to put the property back into trust for you, but if the company doesn’t handle the recording, then you can arrange to record the deed, most commonly with the help of the lawyer who drafted your trust documents.

Real estate sale​ — Sometimes, when you sell real estate held in your trust, the title company will “demand” that you open a bank account in your trust’s name or else they will not remit funds to you. When this issue comes up, it’s always at the last possible moment, which causes unnecessary stress. There are two ways you can instruct the escrow officer to avoid this headache. First, you can assign your sale contract from yourselves as trustees of your trust, to yourselves as individuals. ​At the time you accept a buyer’s offer​, direct your real estate agent to include an Addendum to assign your contract (which includes receiving the money from escrow on closing) out of your trust to yourself. The second method (if the title company refuses to accept the first option and you can’t fire them) is to instruct the escrow to prepare a deed so you can remove the property from your trust to yourself, the same way you would if your lender required removing property from a trust for a loan.

New real estate purchase​ — Take title to newly purchased or acquired real estate as trustee(s) of your trust. You can tell your real estate agent and your escrow officer that you have a trust. The escrow officer may ask to see your trust, so their staff can prepare the necessary documents. If you take out a loan to buy the property, and your lender tells you that you can’t hold title in your trust when they lend you the money, then see the paragraph above on refinancing for more information on what to do.

Things to do after you sign your living trust

If you have already established a living trust to avoid probate, congratulations! This post is about the short list of things you should do after you sign your living trust.

Property Insurance​ — Contact your insurance agent to get a ​Trust Endorsement​ added to your insurance coverage for your home, any other real estate you own, and (if applicable) any insured business property you own. A Trust Endorsement is an addition to your insurance policy, which makes your trust, and you as trustee(s) of your trust, a named insured on the policy. To the best of my knowledge, most insurance carriers provide a Trust Endorsement at no additional charge.

Financial Accounts​ — You will need to update your “pay on death” (“POD”) or “transfer on death” (“TOD”) beneficiary designations with the institutions that hold your money. For ​bank accounts and non-retirement investment accounts​, you can name your trust as the primary beneficiary, as this will give your successor trustee immediate access to funds to pay your final expenses and ongoing bills during the trust administration.

For retirement and other tax-driven accounts​, seek the advice of a tax professional like a CPA before​ you update your pay on death provisions, because there can be different tax outcomes for your loved ones depending on the particular POD/TOD designations — the Congress tinkers with inherited retirement account tax rules somewhat frequently.

A tale of two estates

When we talk about “avoiding probate,” it can seem rather abstract to those people who have not experienced the probate court process. Instead of boring you with an overview of the probate court process, here is a tale of two families — one of whom had no estate plan. There are significant differences between avoiding probate and going through probate, in costs and time spent doing the administration.

The family of John Q. Public and Jane R. Public was fortunate: not only did Mr. and Mrs. Public pay off their home and have a comfortable retirement fund, they also established the John Q. and Jane R. Public 2010 Trust, a revocable living trust, to get their affairs in order. So, in 2021, after both Mr. and Mrs. Public passed away, their children were able to take care of the couple’s final expenses, pay off debts, sell the house, and make distributions, all in less than a year. Other than the broker commissions and closing costs incurred in the home sale, the family spent less than two percent of the trust estate on administrative expenses.

The surviving children of Lisa Doe were not so fortunate. Mrs. Doe, a widow, always planned to get her affairs in order, but after losing Mr. Doe, she never got around to it. When Mrs. Doe passed away in 2020, she owned a home, a retirement account, and assorted items of personal property. Since the value of the home exceeded the probate exclusion amount (which is only $166,250.00), one of her children had to open a probate case for the Doe estate. Sadly, that case is still winding its way through the probate court in 2022. By the time the probate closes, the estate will spend between four and eight percent of the estate value on statutory probate fees, court filing fees, and associated costs, plus the costs incurred in the home sale.

If both estates described above are worth $1 million, then the difference in administrative costs will be tens of thousands of dollars more for the Doe family in probate court, compared to doing all the same work outside of court like the Public family were able to do, thanks to the living trust.

For more information about common questions and estate planning issues, click here. To schedule a free consultation, click here.

The thing about copies of estate plan documents

One of the many advantages of using a trust (rather than just a will) for your estate plan is that, if an original trust cannot be located, then (subject to a limited exception) a copy of the trust may be used in its place under the Evidence Code, which often allows for a copy of a document to be used in place of an original. The exception is for cases when there is other evidence to prove that the original trust is missing because the person who signed it intended to revoke it by destroying it.

In contrast, if an original will is in a person’s possession at the time of their death, and if they were not incompetent at that time, then the missing will is presumed to have been destroyed by that person with the intent to revoke it (California Probate Code § 6124). This rule is a throwback to the old English tradition of revoking a will by burning it in the fireplace. While the lost will rule is certainly rather antiquated, it still does cause problems for families from time to time.

How long does it take to create an estate plan?

One of the big reasons that many people never get their affairs in order is because they (mistakenly) believe that the process will take forever, and involve gathering their entire financial life. And to be fair, traditionally, estate planning lawyers would give clients a very long, very detailed “questionnaire” — some lawyers still engage in this practice. That questionnaire would often take hours for the client to fill out. “Oh great! Hours of homework after a long day, what fun!” … said no one, ever.

These days, thanks to advances in technology, the estate planning process can be much easier and faster than in years past. Also, since identity theft is now a much greater problem than it was in the past, the trend in estate plan drafting is to avoid gathering sensitive financial information. Instead, we estate planning lawyers can use intentionally broad, inclusive language to describe “everything” our clients own as being intentionally placed into their trust.

As a result of these changes, today the estate planning process can be very convenient. For example, most of my clients make a time commitment of 90 minutes or less (20 to 30 minutes for a consultation, and 45 to 60 minutes for their signing) to get their estate plans prepared and signed. When one considers that a 90 minute time commitment now can save a client’s loved ones from enduring up to three years in Probate Court later, it seems a very worthy use of time.

For more information about common questions and estate planning issues, click here. To schedule a free consultation, click here.

Where should you keep your estate plan documents?

I tell all of my clients that they can keep their estate plan documents at home, in a locked safe. Sometimes, a client will ask: “Really? Not in a safety deposit box at the bank?” Here is why it is important to keep your original estate plan documents in a locked safe.

Most people don’t realize it, but a safety deposit box is actually a special type of bank account. Why is this important? Because, if the people left in charge of your affairs are not named as co-owners of the box, and if they don’t have a key, then they will have an expensive, time-consuming job ahead. If you die, then the person you left in charge of your affairs will have to go to court to get a judge to order the bank to drill the lock, so they can access the pertinent documents.

On the other hand, if you provide the people you have named to be in charge of your affairs with: (1) copies of your incapacity documents (Durable Power of Attorney and Advance Health Care Directive), and (2) the location of your original documents (“by the way, my estate plan documents are in my safe at home”), then you should be covered in case you become incapacitated or pass away suddenly and unexpectedly.

Qualities a successor trustee / executor / attorney in fact should have

Who you choose to be in charge of your affairs in case of incapacity or death is obviously an important decision with far reaching consequences. Here is a list of qualities to keep in mind when deciding who to leave in charge of your affairs:

  • Honesty — this quality needs no further explanation.
  • Financial diligence — it is important that bills and expenses are paid on time, and in order of their legal priority.
  • Fair mindedness — anyone managing your affairs because you can’t is legally obligated to look after your best interests (if you are alive but incapacitated), and those of your beneficiaries (if you have passed away).
  • Task master — Certain tasks must be completed by a predetermined deadline.
  • Willingness to acknowledge things they cannot do alone — not only is a successor empowered to hire professionals like attorneys and accountants, the law requires a successor to get help for things they don’t know how to do on their own.

Of course, the flip side of the coin is to keep in mind qualities that a successor should not possess. There is an old saying, widely attributed to 19th Century orator Robert G. Ingersoll: “Nothing discloses real character like the use of power.” We all know people who let a little power go to their heads. In selecting successors, if you do nothing else, be sure to avoid selecting a successor who may get carried away with “being in charge” of your affairs.

For more information about common questions and estate planning issues, click here. To schedule a free consultation, click here.

Inheritance and taxes

Everyone understands that death and taxes are unavoidable. Often, clients ask me about the tax issues that may apply to their loved ones who inherit assets. Here is a very summarized overview.

There are four main kinds of taxes that often come up when someone inherits:

  • Estate tax;
  • Income tax;
  • Capital gains tax; and
  • Property tax, for inherited real estate.

With one limited exception (for a Permanent Resident surviving spouse), estate tax only applies to very large estates: for 2022, only the amount over $12.06 million for an individual, or double that ($24.12 million) for a married couple. The tax applies only to the portion of the estate over the (very generous) exemption amount.

Income tax can apply to inherited retirement accounts, depending on when the person who inherited the account draws money out. It is rather easy to defer or minimize the taxes, but the rules are complex, so you should talk to a tax expert like a CPA for more details. Income tax can also become due after someone inherits a non-retirement stock account, if that account produces taxable interest or dividend income.

Capital gains tax can be due if someone inherits assets like real estate or stock, and then holds the inherited asset long enough for it to appreciate in value before selling. The capital gains tax “basis” value for an inherited asset is the value of that asset as of the date it was inherited, not the value of the asset when the deceased person purchased it.

For people who inherit real estate and hold it, there can be an increase in the annual property tax bill payable to the County where the land is located. However, real estate is generally sold as part of the trust administration, so this is a less typical (but possible) tax issue. Whether or not the land is sold, if the County is allowed to reassess under the tax rules, then there will also be a Supplemental Assessment, pro-rated from the date of death, to the end of the current property tax year.

Standard disclaimer re: posts

The information provided below is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation. If you would like to schedule a free consult call, you can contact us by clicking here.

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