QUARTERLY INSIGHTS FOR CLIENTS: Keeping Your Revocable Trust Funded Is More Important than EverOctober 2014
What Is a “Funded” Revocable Trust?
The key element in the typical California estate plan is the revocable trust. Sometimes considered a “will substitute,” a revocable trust disposes of the assets in your estate upon your death. If the revocable trust is “funded” – meaning that title to assets is held in the name of the trustees of the trust – then upon your death the successor trustee named in the trust can take over and distribute the assets to those you named as beneficiaries, without any probate court involvement. As a technical matter, assets should always be held in the names of the trustees of the trust but this newsletter uses the more casual terminology of title being held by “the trust.” Many revocable trusts have a schedule listing assets held in the trust, intended to be a backstop for avoiding probate in case any assets listed on the schedule were not retitled in the name of the trust before your death.
What if a Revocable Trust Is not Funded?
If a revocable trust is not fully funded, it means that some of your assets are not formally titled in the name of your trust on the date of your death. In that case, the assets not titled in the name of your trust become subject to your will. In most estate plans, the will is a “pour-over” document that passes any non-trust assets to the trust. The problem is that using the pour over will to pass non-trust assets to the revocable trust will be much more difficult for your successors than if your trust was fully funded at death. Your family or other successors will need to either:
1. go to court to request an order that assets not titled in the name of your trust are, in fact, trust assets (the assets need to be specifically identified and become part of the public record for anyone to view); or
2. open a court-supervised probate proceeding for assets not titled in the name of your trust if the court will not issue such an order (the assets need to be specifically identified AND VALUED and become part of the public record for anyone to view); or
3. take advantage of a shortcut affidavit procedure if the total value of non-trust accounts is less than $150,000 (see detailed discussion below under “Small Estate Property”).
In many cases, successor trustees have been able to successfully petition the local probate court for an order that assets not titled in the name of the trust are in fact trust assets, without the need for a full probate proceeding. These petitions usually rely either on language in a schedule to the revocable trust agreement declaring that listed assets are held in the trust, or on a separate assignment document, even if the assets are not actually titled in the name of the trust. Based on two California appellate court decisions, estate lawyers have been able to obtain the necessary court orders at a lower cost and with less time delay than if a full probate were required.
An unwelcome new development in a few local probate courts is application of a much stricter interpretation of what kind of language is needed in a trust to obtain an order that assets are deemed to be held in the trust even if not properly titled in the name of the trust. In addition, the accustomed standards and procedures that have been applied by many courts are being abandoned by some local courts. This means that obtaining an order that assets not titled in the trust are in fact trust assets has become less certain in some courts, and more costly as a result of unpredictable court-ordered continuances and procedural requirements.
Even worse, this can mean that relying on language in the revocable trust or its schedules, or in a separate assignment document, declaring that listed assets are intended to be held in the trust, may no longer be enough to avoid the probate of those assets if not titled in the name of the trust. Also, to the extent that the trust has no such helpful language at all, and there is no separate assignment document, any assets not properly titled will certainly have to be probated. There are many good reasons why a decedent’s executor, heirs and beneficiaries dread probate, including:
* Mandatory fees for court petitions, publication of notice to creditors, and probate referees.
* Executor’s commissions and attorney’s fees set by state law.
* The need to obtain court approval that the decedent’s will is valid and to admit it to probate, to distribute any assets to beneficiaries, and to close the probate proceeding.
* The requirement to file a public inventory listing all the assets subject to probate and reporting their value as determined by a court-appointed probate referee.
* The need to either obtain court approval or notify and obtain consent of beneficiaries and heirs for a multitude of actions, including purchasing and selling assets, making investments, paying or settling creditors’ claims, handling operation of ongoing businesses, and borrowing funds.
* The need to present an accounting of all actions taken while executor or obtain an accounting waiver from each beneficiary.
* The need to adhere to a number of statutory deadlines imposed on the executor, and the inevitable delay in distributing assets to beneficiaries that probate causes.
All of the above disadvantages may be multiplied if you own real property in several states and need to open a separate probate proceeding in each of those states. Titling real property in the name of the trust avoids these duplicative probate proceedings.
Why Would a Revocable Trust not Be Funded?
The process of completing a basic estate plan does not end when you sign your will, revocable trust, durable powers of attorney, and advance health care directive. Title to assets needs to be changed formally to the name of the trust. Many individuals personally take on the responsibility of handling this step rather than involving their estate planning attorney, often by following written instructions provided by their attorney. However, sometimes these individuals fail to transfer all of their assets to the trust, whether due to procrastination, the daunting number of forms that could be required, or otherwise. Even more common is making new investments or purchases in your own name rather than the name of trust. Sometimes refinancing real property requires first taking the property out of the trust for mortgage security reasons, but the second step of returning the property to the trust can be neglected.
To avoid this problem, you should periodically check to see that title to your assets, particularly those acquired since you signed your trust, is in the name of your trust. If you have any questions about which assets should be so titled, a simple call or email to your estate planning attorney can limit the risk of leaving your trust less than fully funded.
Assets To Leave Out of a Revocable Trust
Paradoxically, many kinds of common assets automatically avoid probate even if not titled in the name of your trust. In fact, putting some of these assets in the trust could cause tax or other problems. These generally are called “non-probate” assets and pass without probate to individuals who may or may not be named in your revocable trust or will. The most common non-probate assets include:
Life Insurance. Life insurance is a contract between the owner of the life insurance policy and a life insurance company. Generally speaking, the life insurance company doesn’t care who you have named as beneficiaries under your revocable trust and will. The life insurance company cares only about who the policy owner named to receive the life insurance proceeds on the death of the insured under the life insurance company’s beneficiary designation form. The life insurance company will pay the proceeds directly to the named beneficiaries without the need for any probate proceeding or court order. If a revocable trust is named as beneficiary, the insurance proceeds will be paid to the trustee of the trust without probate or other court proceeding. However, if there is no effective beneficiary designation and the policy owner is the insured, the proceeds will be paid to the insured’s estate, subject to probate. It is therefore important to review and update beneficiary designations regularly.
IRAs and Retirement Plans. Your IRAs, 401(k) plans, pension and profit-sharing plans, and other employee benefit or retirement plans invariably give you the ability to name the beneficiaries to receive these assets upon your death. The company, plan custodian, or other manager of your accounts will pay the benefits, or change ownership of your accounts, according to beneficiary designation forms and account contracts you completed, typically when you opened the accounts. Usually no probate or other court proceeding is needed. One exception can be if you failed to effectively designate a beneficiary to receive the account assets on death. The account agreement may provide for payment to your estate in such case. Depending on the size of the account, a probate proceeding may be needed to pass that account to the beneficiaries of your estate who you named in your will.
Joint Tenancies and Community Property With Right of Survivorship. Sometimes individuals own assets together as “joint tenants” or “joint tenants with right of survivorship.” These assets pass directly to the surviving joint tenants when one of the other joint tenants dies. No probate or other court proceeding is needed. In many cases joint tenancies are to be avoided as they can undermine an estate plan. For example, if you want your beneficiaries to be those named in your revocable trust, and you own some assets in joint tenancy with someone else, the surviving joint tenant will receive those assets upon your death rather than the beneficiaries named in your revocable trust. Similar issues arise when property is held with a spouse as “community property with right of survivorship.”
Vehicles and Vessels. Vehicles and vessels registered with the DMV may be excluded from probate, and may be claimed by survivors named either in the title document (if registered in both your name and the name of someone else) or under your will, or by heirs, by using a form affidavit.
Small Estate Property. California statutes provide that if the total value of a decedent’s personal property (such as bank and investment accounts) is no more than $150,000 at death, neither a probate nor other court proceeding will be needed to pass the assets to beneficiaries. For this purpose, only assets owned by the decedent in his/her individual name “count” towards the $150,000. Typically this requires beneficiaries named under your will (who would be the successor Trustee of your trust if you have a pour-over will) to complete an affidavit documenting that they are entitled to these assets, once 40 days have passed since the date of death. The affidavit is then presented to the person or institution in possession of the asset, and the beneficiary becomes entitled to collect the asset. There is a similar shortcut for California real property where the total value of real and personal property is no more than $150,000. This involves one very short petition to the court (much better than a drawn out probate proceeding). As California real property tends to be valuable, practically speaking this simple procedure is rarely available.
While estate planning lawyers are used to thinking about probate and non-probate assets, and which should be titled in your revocable trust and which should not, such distinctions may be hard to keep in mind if you are not dealing with them on a daily basis. Since the consequences of not formally titling probate assets in the name of your trust can be so burdensome for your family and other successors, particularly with the less than helpful approach recently adopted by some local courts, it makes sense to check with your estate planning attorney from time to time about this. It makes particular sense to do so whenever making a new investment or acquiring a new asset, to ensure that title is held in a way that is consistent with your goal of avoiding probate.