Many Folsom families have built their living trust estate plan. Great job! Your family and assets are better protected.
However, you aren’t done with your estate planning. In fact, you're never quite done with your estate planning until you are done, which means you are really done, done with everything, and your family is now finding out whether your estate plan will work.
Whether your living trust estate plan works, and keeps your family out of probate will depend on whether you funded it. Funding your living trust means transferring ownership of the assets that would go through probate to your trust.
Funding means transferring ownership of the assets that would otherwise go through probate into your trust. The assets that would go through probate are real property, plus bank and investment accounts and other assets, with a combined value of more than $208,850. That is the current California small-estate probate threshold.
Your home is the big one. If you, or your estate planning attorney, never recorded a deed transferring title from you to you as trustee of your living trust, your family will have to take the home through probate.
The same goes for accounts. If you have three bank accounts worth $50,000 and a brokerage account worth $200,000, that is $250,000, which is over the $208,850 threshold. Your family takes those assets through probate too.
What are the assets that would go through probate? Real property,and bank and investment accounts, and other assets, that have a combined value of more than $208,850. This is the current California probate threshold.
Real property - your home, is the big one. If you, or your estate planning attorney, have not recorded a deed transferring title of your home from you or you and your spouse, to you or you and your spouse as trustee of your living trust, then your family will have to take your home through probate. If you have three bank accounts worth $50,000, and a brokerage account worth $200,000 = $250,000, which is more than the $208,850 California probate threshold, your family will have to take those assets through probate.
Who cares? What’s the big deal about probate? Three things: 1) California probate is expensive. The probate fees and costs for a $1 million estate would be about $54,000. The probate fees and costs for a $2 million estate would be $74,000.
Let’s compare. If you have funded your living trust, your probate fees and costs for a $1 million estate would be $0, and the probate fees and costs for a $2 million estate would be $0. Big difference.
Your home and other properties need to be titled in your living trust. Your estate planning attorney should do this for you when you set up your estate plan. Make sure it was done. You should have received a copy of the recorded deed showing title was transferred to your trust. You can also check your property tax bill. It will indicate whether your trust is the owner.
If you buy a new property, make sure title is put in your trust from the beginning. Have the escrow agent prepare a deed transferring title from the seller to your trust.
Refinance. If you’ve refinanced your mortgage, the title to your home may no longer be in your trust. When you refi, your lender needs the title of your home to be in your name or your and your spouse’s name. So at the escrow signing, they will have you sign a deed transferring title from your trust to your name. Often, the closing documents will include a second deed transferring title back to your trust. But not always. Sometimes, there is no second deed, and the title to your home remains outside your trust. If you’ve refinanced since you set up your estate plan, then you must confirm title is still in your trust. If it’s not, call your estate planning attorney and she can prepare and record a new deed to put the title back in your trust.
To transfer ownership of your bank accounts to your trust, you have to make an appointment with your bank representative, show them a copy of your trust, complete their certification of trust and other paperwork, and they will probably make you create new accounts. Most national banks don’t make this easy. Local banks and credit unions can be easier to work with.
If you don’t want to deal with your bank, and believe me, I get it, then don’t leave a lot in your bank accounts. Remember, the California probate threshold is $208,850. If you don’t keep a lot in your bank accounts (BTW most people don’t keep more than $10,000 - $50,000 in their bank accounts), then the accounts won’t be subject to probate. And if you’re married and you own your accounts jointly, then when you pass away, your spouse still owns the accounts, and, therefore, no probate.
For our purpose here, investment accounts do not include retirement plans - IRA, 401k, 403b, etc. When you pass away, your retirement plans will pay out to the beneficiaries you have named on the designated beneficiary forms from your financial institution. More on this below.
For investment accounts, also known as brokerage accounts, taxable accounts, and non-qualified accounts, you need to own them in your trust. More frequently than bank accounts, investment accounts will surpass the probate threshold.
Transferring ownership of your investment accounts is similar to the bank account transfer process. However, if you have a financial advisor, he and his staff should make the process easy - unlike the banks, which tend to make this difficult. At the end of the day, you or you and your spouse as trustee of your trust should be the account owner.
Retirement plans will not go through probate unless you fail to name a designated beneficiary. I won’t go into detail on how to name beneficiaries on your IRA, I covered that here.
Make sure you have designated beneficiaries. In most cases, you will name your spouse as primary beneficiary and your adult children as contingent beneficiaries. If you are not married, you will name your adult children as primary beneficiary. If you don’t have children, you will name loved ones or charities as beneficiaries. If you don’t have a designated beneficiary when you die, your IRA will most likely go through probate.
This becomes an issue when the IRA owner named his spouse as primary beneficiary and didn’t name a contingent beneficiary. And after his wife dies, he has no beneficiary, and he didn’t update his beneficiary designation form. So when he dies, he has no beneficiary, and the IRA goes through probate.
You should review your beneficiary designations every few years to make sure they are what you think they are.
Life insurance and annuities are similar to retirement plans in that they pay out to your named beneficiaries. But you need to name beneficiaries and update as needed. If, when you die, you don’t have a beneficiary named, the life insurance or annuity death benefits will have to go through probate.
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Check your home first. Pull your recorded deed or your property tax bill and confirm title is held in the name of your trust. Then confirm your brokerage and other large accounts are owned by the trust, and confirm every retirement account, life insurance policy, and annuity has current primary and contingent beneficiaries. If any of those is in your individual name with no trust ownership and no beneficiary, that asset is exposed to probate.
It avoids probate on the assets you actually transfer into the trust, plus assets that pass by beneficiary designation. The gap is the asset you forgot. A pour-over will catches stray assets, but only by sending them through probate. Funding is what keeps your family out of court.
It would pass through probate. Refinancing often pulls your home out of the trust temporarily, and putting it back is not always part of the closing. If you have refinanced since setting up your plan, confirm title is back in your trust now rather than leaving your family to discover the problem later.
Not always. If your combined probate-exposed assets stay under the $208,850 California threshold, or if you are married and hold accounts jointly so they pass to your spouse, the accounts may not need to be in the trust. The accounts that can trigger probate are your home and your larger investment accounts - and large bank accounts
Not at all. You can fund a trust at any time while you are alive. It's only too late if you're dead. The common situation we see is a trust signed years ago with the home properly titled but accounts or a post-refinance deed left undone. That's easy to correct.