The last step of an estate plan is one that all too often gets forgotten. That’s too bad, because unless you retitle assets so that they are owned by the trusts created for the plan, means that all good planning could be worthless.
When you are done creating an estate plan, your estate planning attorney might give you a list of items that you need to take care of, including retitling or changing the ownership of things like bank accounts, brokerage accounts, shares of a privately owned business, real estate and other assets.
These assets must be put into the trust while you’re alive, to avoid probate or be distributed to the trust as a beneficiary upon your death.
Insurance News Net recently published an article, “Funding your trust and avoiding probate,” that explains that your will probably leaves everything to your trust. However, wills must pass through probate. As a result, people frequently place most of their holdings in trust, but often forget about a few assets. If the assets aren't titled in the name of the trust, those assets must be probated, unless they are within the dollar limits of any applicable state small estate statute.
Some assets will not be controlled by the trust at all. Assets owned jointly with the right of survivorship pass directly to the survivor, regardless what the estate planning documents say.
There are assets like IRAs, annuities, and life insurance that pass directly to the beneficiaries who were designated by the owner at the time the account was started or by a subsequent change that the owner made.
In some circumstances, as noted above, the owner of those types of accounts will name their trust as the beneficiary. This can be ideal for life insurance contracts, because the death benefits are income tax free.
However, there are some tax considerations to understand before naming a trust as the beneficiary of an annuity or IRA. Some trusts don’t allow the IRA to be stretched for continued tax deferral.
In addition, no trusts allow a deferred annuity to be stretched.
The annuity proceeds must be distributed over five years, if the trust is the owner or beneficiary.
In certain cases, it's better to have the annuity or IRA avoid the trust and pass to the beneficiaries directly.
Your Houston estate planning attorney will be able to look at all your assets and determine the best plan for protecting them. Every situation is different, so a local attorney who is familiar with the laws of your state is the best option.
Reference: Insurance News Net (June 30, 2019) “Funding your trust and avoiding probate”