Naming primary and contingent beneficiaries of your IRA is an essential part of your estate plan
How to Fund Your California Living Trust Checklist
How to transfer your assets to your California Living Trust to avoid probate
Good job on setting up your living trust estate plan! You are now among the smart and proactive group that has taken life into your own hands and will not passively leave their family unprotected. In contrast, AARP has reported that sixty percent of Americans have done no estate planning.
One of the main reasons you set up your living trust was to avoid probate. In California, real property and other assets worth more than $184,500 will go through probate. However if you have transferred your probate assets to your living trust, your family will avoid probate, and save tens of thousands of dollars in probate fees. More on California Probate.
But, having a living trust is not enough. You have to actually transfer your assets to your living trust. Transferring your assets to your living trust is called “funding” your trust.
In California, real property will go through probate if it is worth more than $61,500.
When you established your living trust, your estate planning attorney should have recorded a deed to transfer title of your home to your living trust. You should keep a copy of the recorded deed. And when you get your next property tax bill, make sure it shows that your home is owned by your trust.
Refinance. If you refinance your home after your home has been transferred to your trust, you need to confirm how your home is currently titled. Typically, when you refinance, the escrow company may make you sign a deed transferring title out of your trust and back in your name.
They do this because the owner of the new refi loan (you) must be the same as the owner of the home. Therefore, you need to tell your lender and the escrow officer to prepare a second deed to transfer title back to your trust and record it after the refi closes. They will do this if you ask them.
If you don’t ask them, then after the refi, your home will no longer be titled in your living trust and it will be subject to probate. If, and when, you discover that title to your home is not in your living trust, you will need to have an attorney or title company transfer title to your living trust. Much better to do this during the refi process.
Bank and Investment Accounts
The California probate threshold in 2022 is $184,500. This means that if your bank accounts and investment accounts that are not titled in your living trust are, in total, worth more than $184,500, then those accounts may have to go through probate. (This does not include retirement plans, which we discuss below.)
To avoid California probate with your bank and investment accounts, you will need to transfer your accounts to your living trust.
As an example, if your account is titled Joseph Garcia and Mary Garcia, you need to change the title to Joseph and Mary Garcia, Trustees of the Joseph and Mary Garcia Family Trust (or whatever the name of your living trust is).
You will need to work with your bank representative or financial advisor. They will want to see your Certification of Trust and certain pages from your living trust. They will also make you complete one or more of their in-house forms.
Some banks and financial institutions may allow you to simply change the name on your existing accounts to your trust. Some will require you to open new trust accounts and transfer your existing funds to the new trust accounts.
When you pass away, your retirement plans, IRAs, 401ks, 457s, etc., will go to the beneficiary you named on your financial institution’s beneficiary designation form. So long as you have named a beneficiary, your retirement plan will not go through probate. You need to name a primary beneficiary and a contingent beneficiary.
Most married couples name their spouse as the primary beneficiary. In fact, in California, which is a community property state, if you name someone other than your spouse as primary beneficiary, your spouse must sign a waiver with the financial institution confirming his or her consent to not being the primary beneficiary.
Most married couples with children name their children as contingent beneficiaries.
It is very important to name contingent beneficiaries. We have seen many cases where the spouse beneficiary died, and the IRA owner spouse failed to name a new primary beneficiary and had never named a contingent beneficiary. And when he died, there was no beneficiary, so the IRA, by default, went to his estate, which required probate.
We don’t recommend you name your living trust as beneficiary of your retirement plan unless there is a compelling reason. If your children are adults and capable of managing their inherited retirement plan, it is more efficient to name them directly as beneficiary.
A typical married couple with adult children would name their beneficiaries as follows:
Primary beneficiary: spouse
Contingent beneficiaries: 50% to child 1, 50% to child 2
However, if you have young children or adult children who may need help managing their inherited retirement plan because they are not good with money, they are disabled or they have drug or alcohol dependencies, then you might want to name your living trust as beneficiary. But, you have to do it correctly.
If your attorney drafted your living trust to include what our firm calls “Asset Protection Trusts” for your children, then you need to name those trusts on the beneficiary designation form.
You can design your trust to leave your inheritance to your children in one of two ways.
Outright distribution - which means your child will receive a check or title to an asset in his or her name. This is a simple solution which works well if you have competent adult children.
Asset Protection Trusts - which means that when you or you and your spouse pass away, your child will receive his or her share in a separate trust created at that time. The separate Asset Protection Trust for each child will significantly protect your child’s inheritance from divorce and lawsuits, and it can be written to allow someone other than your child to be the trustee to manage your child's inherited assets.
If you don’t want your retirement plan to go directly to your child, you need to name their separate Asset Protection Trust as the beneficiary. We recommend you name their separate trust on the beneficiary designation form as follows:
50% to the Trustee of the Joseph and Mary Garcia Family Trust, FBO child 1’s name
50% to the Trustee of the Joseph and Mary Garcia Family Trust, FBO child 2’s name
FBO means "for the benefit of."
Life insurance is similar to retirement plans in that it will not go through probate if you have named a beneficiary. But unlike retirement plans, life insurance death benefits are not subject to income tax.
For married couples, we recommend you name your spouse as your primary beneficiary.
If you have capable adult children, you can name your children directly as the contingent beneficiaries.
If you have included Asset Protection Trusts for your children in your living trust, then you should name your living trust as the contingent beneficiary. By doing this, the money from the life insurance death benefit can be funded into the Asset Protection Trusts and will be significantly protected from a divorce claim or lawsuit against your child.
Unlike with retirement plans, you don’t have to name the separate asset protection trust for each child. You can simply name your living trust as the contingent beneficiary. FYI retirement plan distributions are taxable and each child should have the option to choose the timing of his or her own distributions.
Life insurance is not taxable, therefore the death benefit can be paid to your trust and your successor trustee can distribute it in equal shares to your children’s respective trusts.
Do not name minor children as beneficiaries of your life insurance. Often life insurance companies will require probate before it will pay out to a minor child. If you have minor children, it is much better to name your living trust as the beneficiary.
If you own a business or own an interest in a business you should document your intent to assign your business interest to your living trust. This can be done informally with an Assignment of Business Interest document your estate planning attorney can prepare for your signature. This is often enough for a small mom and pop business.
If your business has many owners, you will need to check your corporate shareholder agreement, LLC operating agreement or partnership agreement to see if there is a required process to transfer your ownership to your living trust.
The best way to transfer your timeshare to your living trust is to contact your timeshare company and initiate the transfer process with them. Every timeshare company has its own way of handling title transfers to a living trust. They will be able to do this for you. It’s a very common request.
Cryptocurrency is like cash. Whoever has possession of it controls it. Possession of crypto is through the private key. The private key is stored in a wallet. The key cannot be known without a PIN and seed phrase/password.
There are two types of wallets. A non-custodial wallet allows for self-custody, and a custodial wallet is controlled by a third party such as Coinbase. The custodial companies are in early stages of dealing with trust ownership. In many cases, there may not be a clear way to transfer ownership to your living trust.
You will need to make sure someone can access your wallet and PIN and seed phrase when you pass away. But you have to be very careful about this. Using a safe or safe deposit box is probably a good idea.
Depending on how much crypto you own, you may need to specifically reference it in your living trust.
Schedule of Trust Property
Make sure your estate planning attorney includes a Schedule of Trust Property with your living trust. The Schedule of Trust Property should include a general statement of your intent to transfer your assets to your trust and identify your specific assets you intend to transfer to your living trust such as your real property, name of your bank, name of your financial institution, name of your business, timeshare and reference to your crypto.
Estate planning is not a static, one-time act. You will need to update your documents as you change or acquire new assets.
If you sell your home and buy a new one, you probably do not have to amend your living trust, but you must make sure title to your new home is in your living trust. You should also update your home address in your estate planning documents and update your Schedule of Trust Property.
Likewise, if you switch banks or financial institutions, you should make sure the new accounts are titled in your trust and update your Schedule of Trust Property.