Estate Planning: How to Avoid Potential Pitfalls

Father and son estate planning

Estate planning is one of the most essential – if uncomfortable – topics to proactively discuss. While it addresses your mortality head-on, it’s the most effective way you can organize your assets for your family and beneficiaries. During this process, you must make clear decisions and work with a qualified attorney to ensure that your wishes take effect when you pass your assets to your loved ones. Your situation is unique, so a personal consultation is the best source for recommendations specific to your estate. Nevertheless, one of the most flexible options for creating your estate plan is to create a revocable trust, which this post will focus on to the exclusion of other options.

Establishing the Revocable Trust

A revocable trust contains provisions that you can change at any time. During the life of the trust, income earned is distributed to you—as the creator of the trust—and only after death does property transfer to the beneficiaries.

The most important things that you’ll need to decide when forming your revocable trust are when, where, and how you want your estate to be distributed. Making these decisions will help your attorney settle the technical aspects of the revocable trust, as well as review which assets belong in the trust while you’re alive, and which assets must be added after your passing.

Without a thorough asset review, your estate plan may be entirely undone despite your meticulous planning. Such a complication can cause your family confusion and legal struggles at the time that they can least deal with them effectively. The critical step that you must take before death is establishing your trust as the beneficiary of certain assets. Neglecting this step can have substantial consequences, which I’ve unfortunately seen occur on several occasions.

A Cautionary Tale

One example that comes to mind is a gentleman diagnosed with a terminal illness in his mid-50s. He was divorced and had two children, both young adults. He anticipated that they might not have the maturity to manage their inheritance responsibly, so he wanted to incorporate trusts into his estate plan. To be as thorough as possible, he researched and found a prestigious estate planning firm nearby. Together, they created a plan to disburse funds from his revocable trust into a trust for each of his children.

As they had written it, the trusts’ principal and income would cover the children’s expenses at the trustee’s discretion. Then, at age 30, the children would each receive direct control over 33 percent of the total trust, and this process would repeat every five years until age 40 when the children would have full control over the trusts. The estate planning firm drafted the documents thoroughly and everything looked to be in order before his passing. On paper, it seemed like he’d done everything necessary to continue looking after his children long after he’d passed.

Unfortunately, after he died, the trustee discovered an unforeseen complication. The gentleman’s most significant assets were his retirement accounts, and he had never updated the Beneficiary Designation Forms on each of those accounts to reflect the correct trusts as the beneficiaries. Sadly, when he passed, the accounts were disbursed to his children immediately in a 50/50 split, bypassing the carefully crafted trusts entirely.

Finding the Effective Solution

As you start your estate planning, it’s essential to keep the above tale in mind. No trust or will can override the officially designated beneficiaries on your accounts. In the above example, we pointed out that retirement accounts cannot fall under your trust’s protective umbrella while you’re alive. Therefore, you need to update its Beneficiary Designation Form each time you update your estate plan to ensure that these documents protect your family.

The same is true for the following asset categories:

  • 401K Accounts
  • Profit-Sharing Accounts
  • IRAs
  • Life Insurance Policies
  • Annuities

For each of these assets, you must use the Beneficiary Designation Form to establish your revocable trust as the primary beneficiary. Once you’ve done so, the instructions you’ve laid out for your trust will apply to all your assets rather than just those which you can place in trust while you’re alive.

Those assets, for which you don’t need to use the Beneficiary Designation Form, include:

  • Real Estate (owned in your name, but the Revocable Trust must hold the deed)
  • Safety Deposit Boxes
  • Checking and Savings CDs
  • Investment Accounts
  • Ownership interests in LLCs

The way to avoid these pitfalls with regard to the assets above is to transfer ownership from your name as an individual owner to your name as trustee of your revocable living trust. In certain instances, assets that are held in an individual’s name cannot be placed in the name of the Trust until after death. In such cases, it may be appropriate to have the applicable beneficiary designation forms reflect the Trust as the Payable on Death beneficiary.

Your estate planning attorney can assist you with transferring title of appropriate assets to your trust. This process, combined with the updated forms submitted for each of your other assets, will provide everything necessary to ensure that your instructions today can be carried out in the future.

Preparing Your Estate

The most important takeaway from this post is that Beneficiary Designation Forms trump any other form of estate planning, no matter how meticulous. We cannot emphasize enough how important it is that you update those forms to reflect your revocable trust as the primary beneficiary. Your family will rely on your present estate planning to know what to do in the future.

When you’re planning your estate, please take all of your Beneficiary Designation Forms with you so that your attorney can complete everything flawlessly. Let your attorney manage these forms and any necessary deeds so that each managing organization observes your wishes and your trust provides the protection and explicit instruction that your family will need. With a competent corporate trustee acting on your behalf, you can avoid unfortunate situations similar to that which happened in the cautionary tale.

This article is for informational and educational purposes only and is not intended to provide specific legal or tax advice. For specific legal or tax advice, please consult with your attorney and/or accountant. Trust and Investment Products are uninsured, not guaranteed by Members Trust Company, any credit union or any federal agency. Any investment exposes an investor to investment risk, including the possible loss of principal.

 

About the Author

Tamara Pataky Kidd, J.D. is a Vice President & Senior Trust Officer at Members Trust Company. Before joining MTC, she served as Merrill Lynch Trust Company’s Chief Trust Officer for the Southeast of the United States.