A reoccurring theme of many Posts is the importance of funding Revocable Trusts to avoid probate and balance the husband’s and wife’s assets for estate tax planning. More times than not, even those clients who go through the trouble of creating Revocable Trusts fail to fund the Trusts. The pour over Will transfers assets to the Trust, and the Trust then takes over. However, those assets passing from the Will to the Trust go through probate.
Probate is only avoided if the Trusts are created and funded. Part of any estate planning lawyer’s job is recommending how to fund the Trusts. For many clients, the primary assets are retirement plan assets, life insurance, and jointly owned assets such as the home, brokerage accounts, and bank accounts.
Generally speaking, the advice often includes the following:
- Retirement Plan Assets (e.g., IRA, 401k). Name each spouse as the primary beneficiary and each spouse’s respective Revocable Trust as the secondary beneficiary.
- Life Insurance. The husband would name his Revocable Trust as the beneficiary of any life insurance policies on his life and the wife would name her Revocable Trust as the beneficiary of any life insurance policies on her life.
- Joint and Liquid Assets. Transfer the ownership of joint and liquid assets to either the husband’s or wife’s Trust, or do "50% tenant in common" interest in each of their Trusts, depending on the need to balance out the assets between each Trust. A narrative description can transfer tangible personal property "50% tenant in common" interest into each Revocable Trust.
Of course, these general rules are subject to each client’s situation. For example, regarding retirement plan assets, how do rollover provisions fit with the planning, or the desire to "stretch" the distributions, or naming a charity as the beneficiary of the assets thereby avoiding double tax. Regarding the life insurance, if the clients have a taxable estate, perhaps the life insurance should be transferred into an Irrevocable Life Insurance Trust, in which case the advice above would not apply. Looking at the joint assets, are asset protection advantages lost if tenants by the entirety property is transferred into separate Trusts. These are but some of the issues that need to be considered with your attorney as you decide how to fund your Revocable Trusts.
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