You probably know someone who spent time, money and energy setting up a revocable trust but his or her loved ones ended up in probate court despite it all. What happened?
One common scenario is that there were too many probatable assets left outside of the trust, and the loved ones could not take control of them without a court order. In California in 2014, if your estate is worth less than $150,000 on your death, your loved ones can transfer the assets by declaration in order to avoid probate. However, if your estate is worth $150,001 on your death, this mechanism is not available to your loved ones. Therefore if your goal is to avoid probate, it’s important to reduce the value of the assets that need to pass through probate in order to be transferred on your death.
What is a probatable asset? Its’ one that does not pass on death by contract and must be transferred by court order. The two most common ways to transfer an asset by contract are 1) by beneficiary designation and 2) by a trust. If an account has a valid beneficiary designation that can be reasonably implemented, on your death it will pass to the person (or entity) that you name as a beneficiary. It passes according to the contract that you have with the financial institution. So, accounts with valid beneficiary designations are NOT probatable assets.
If an asset is held as part of your trust estate, on your death it is managed according to the terms of the trust document. Because the trust document is essentially a contract, the real estate is transferred by contract and is NOT a probatable asset. Your loved ones do not need a court order to manage the assets held in the trust. This is why many people make trusts in order to avoid probate.
So, what should you transfer into your trust? If you wish to avoid probate, any financial account that does not have a beneficiary designation should be transferred into your trust. Generally speaking, real property should be transferred into your trust. Vehicles and other personal property of significant value should be transferred into your trust. Anything else that you wish to be part of your trust distribution plan should be transferred into your trust.
One more complexity in this analysis is that you may have loved ones that you want to receive your things on your death but they do not have the capacity to own these assets either because of a disability, because they are simply too young or because they are receiving government benefits that would be discontinued if they receive your money. You should not name these individuals as your beneficiaries on your accounts, and you might consider naming your trust as the beneficiary of these accounts instead.
To answer “What assets should I transfer into my trust?” you and your advisors should consider the types of assets that you own, the overall value of the assets that you own and whom you would like to receive those assets. The answer is not a simple one, so if you need help, you should consult your attorney, CPA or other financial advisor.
Originally published by Susan on March 10, 2014.