An Empowering Estate Tidbit and Valid Estate Planning Strategy      

Did You Know that a Person Could Die With Both a Trust and a Non-Trust Estate ? – An Empowering Estate Tidbit and Valid Estate Planning Strategy       

By Attorney Paul Hanks, Ironclad Living Trusts in California

The Revocable Living Trust is an amazingly powerful and flexible instrument, yet there is a misnomer that once a trust is created that all assets get piled into the trust.

Once a living trust is in place, two estates could actually exist upon the trust creators death – a Trust estate and notably a non-trust estate. 

An obvious example of a Trust estate asset would be a home that is not only identified in the trust but deeded into the trust – thus that asset has actually become titled in the name of the trust. This is also known as Funding a Living Trust. Another common example of titling an asset into the name of the trust is a bank account – the trust creator would merely direct their bank to title a checking or savings account, for example, into the name of the trust. A neat and effective alternative is to leave the bank accounts titled in the trust creators individual names, and instead merely have the bank identify your trust as the pay-on-death beneficiary of those accounts. 

Then there is an estate world that can exist completely outside of a trust. Let’s take an individual retirement account, by way of example. Unlike titling a home or bank account into the name of your trust, beware that adverse tax consequences could result by the transfer and titling of certain assets into a trust, such as for example an Individual Retirement Account. So we avoid doing so and instead examine how such retirement accounts can pass completely outside of trust by way of the beneficiary designation. Think of this probate avoidance approach as the non-trust world functioning in its independent sphere.  

The longstanding and prevailing recommendation for retirement accounts is for the spouse to be named as the individual primary beneficiary, or if there be no spouse then adult children. This approach serves the dual goals of avoiding probate without triggering any tax issues. Interestingly the trust world can be introduced into the sovereign realm in which the sensitivity of an IRA is preserved, and that is accomplished merely by naming the trust as the alternate beneficiary after one’s spouse. The trust creator must learn and recognize that there is a big difference between the trust actually owning an asset versus the trust merely serving as a vessel to which that asset is directed by way of its beneficiary designation.

This leads to a common question of my clients – why would I name my trust as beneficiary of my IRA rather than my children? The answer to that question depends. Here is my opinion on the best choice. If your children are healthy, responsible adults, they can be named beneficiaries. But if your children are minors, or disabled adults, or irresponsible with such things as drug use or being reckless with money, you would want to name your trust as secondary beneficiary after your spouse.   

Estate planning is a process and must be approached with a dynamic and flexible mind. There is no one size fits all approach. Leave the generic internet skeletal trusts that are peddled to the masses on the sidelines where they belong. Empower yourself with information and “look before you leap”, to borrow an old saying which holds true today. 

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