Generally, a deceased person’s assets are distributed at death in accordance with the terms of a Will or, if a Will was not prepared, in accordance with the statutes of descent and distribution. This process takes place through a probate court in the state of the deceased individual’s residence. If the decedent has property in more than one state, proceedings may be necessary in multiple probate courts. Because court proceedings are often public, time consuming and expensive, it is wise to consider alternatives to probate court when developing an estate plan. Two methods of transferring assets outside of probate are TOD/POD accounts and revocable living trusts.
A Transfer on Death Account (TOD), also known as a Totten Trust, is a non-retirement financial account that allows an account holder to name a beneficiary to receive the account assets at the time of the account holder’s death. A TOD account is generally a brokerage account that holds stocks, bonds, or other investment assets. A Payable on Death Account (POD) is similar to a TOD account and holds cash assets instead of securities.
One method of estate planning is to avoid probate by titling real estate with a survivorship deed, naming beneficiaries on investment accounts and insurance policies, and using TOD/POD accounts for financial assets that do not permit transfer through a beneficiary designation. These assets will transfer directly at death, thereby achieving the principal advantage of avoiding probate. The beneficiary need only present a copy of the death certificate and fill out a few forms to facilitate the transfer.
It is often overlooked that assets transferred by TOD, POD, or beneficiary designation may still be subject to estate tax. Further, the decedent or his estate may have income tax, creditor claims, estate administration costs, or other expenses. If the entirety of the decedent’s liquid assets transfer directly to beneficiaries outside of probate, the estate would not have cash available to pay expenses. The executor of the estate may be required to recapture funds by requesting beneficiaries return funds transferred to them. If the beneficiaries refuse, the executor may have to seek recovery from the beneficiaries through legal process.
A revocable trust provides the flexibility to plan for life events as well as at death. An individual (the “Grantor”) creates a revocable trust by signing a trust agreement. The trust agreement will identify a person or corporation who will administer the trust, referred to as the “Trustee”. In many cases the Grantor will serve as the initial Trustee. The Grantor will next decide whether to fund the trust with assets during his/her lifetime or at the time of death.
Some decide against funding the trust during their lifetime. This is typically done by parents of minor children who want to name the trust as contingent beneficiary of life insurance and retirement accounts. The trust will contain terms for how the funds may be used for the health, maintenance, and education of the minor children and define milestones for distribution of trust assets to the children after reaching the age of majority.
To achieve the most benefit from a revocable living trust, the trust should be funded during the Grantor’s lifetime. The trust is funded by simply titling assets in the name of the trust. During the Grantor’s lifetime the assets in the trust may be used for the benefit of the Grantor or for the trust beneficiaries. The Grantor may also remove assets from the trust or make changes to the trust terms.
One of the primary benefits of a trust funded during the lifetime of the Grantor is the avoidance of probate. At the time of the Grantor’s death, trust assets will be distributed to beneficiaries in accordance with the terms of the trust rather than through the probate court. If the Grantor has property in multiple states, titling property in the name of the trust will avoid having to open probate estates in multiple states. Trusts also avoid the problem of not having cash available to pay last expenses because the trustee may liquidate trust assets to pay expenses. Any assets that are not titled in the name of the trust may transfer to the trust at the time of death through a pour-over will. However, assets that are not titled in the name of the trust at death may be subject to the probate process.
A funded trust may also be beneficial in the event the Grantor becomes disabled in the event of an injury or illness. The trustee may continue to manage the trust assets for the benefit of the Grantor and his/her beneficiaries. This alleviates the need to file a public record legal proceeding to appoint a guardian over the Grantor’s assets, avoiding expense, time delay, and privacy concerns.
A common misunderstanding is that a revocable trust provides protection from creditors or estate taxes. It is also commonly thought that placing assets in a revocable trust may protect assets from the Medicaid spend down requirements. Because the Grantor retains control over assets in a revocable trust, the trust assets are still considered part of the Grantor’s estate.
We invite you to reach out to a member of the EBS team to discuss whether an update of your current estate plan is recommended.
EBS is not an accounting or law firm and the foregoing is a general summary of the rules and limitations that may apply to you. It is not intended to apply to all persons and situations, and you should contact your tax or legal professional for advice. Please contact a member of the Wealth Management Group to discuss your specific situation.
Data provided has been obtained by third party sources. This data, while believed to be reliable, has not been independently verified by EBS.