Asset Titling: A Cautionary Tale
By Jasen M. Gilbert CFP®
Your estate takes years of careful consideration and monitoring to grow, but a small error in the titling of an asset may create unintentional and unwanted consequences for you and your loved ones. Detailed documentation of your asset succession plan could save your family time and money. I recently had the opportunity to sit down with Andrew J. Krause and Juan Bendeck; Board Certified Florida Wills Trusts & Estates Attorneys and Partners with Hahn Loeser & Parks LLP, to discuss some of the common estate planning and asset titling issues to look out for. I have created a fictional scenario to better illustrate some of the points we discussed.
In this scenario, married couple John and Mary, are reviewing their estate plan. They have several heirs including children and grandchildren and want to make sure they have a plan in place that will allow their assets to pass with minimal complications. What are some of the considerations they should account for when titling their assets?
Do accounts which should be going into a trust have a “Payable on Death” (POD) individual beneficiary designation?
John has set up a revocable trust to ensure that assets are dispersed evenly amongst his children. This could prevent family feuding over who gets what and could also allow the assets to pass with less legal complications. Unfortunately, John listed one of his children as a beneficiary of a POD bank account instead of having it go into the trust. When he passes, those assets will then go directly to the beneficiary of the account and completely bypass the trust. After all the work that went into setting up the trust, John may want to make sure that those assets are set to go to the correct place.
Should the trust be named as the beneficiary of an annuity or an IRA account?
Mary has an annuity and an IRA account which she has designated to go into her revocable trust. While this could be a viable option, in many cases this may be problematic when it comes to stretching an inherited account. Retirement accounts are subject to required minimum distributions (RMDs) based on the life expectancy of the account holder. When the account holder passes, in some cases, it can be recalculated for the beneficiary’s life expectancy and distributed over their lifetime. If the beneficiary is a non-human entity, such as a revocable trust, then this may not be available. When an annuity is part of an estate, the entirety of the account may have to be withdrawn over a period of 5 years instead of remaining in the account and continuing to grow. An option could be to have an individual named as a beneficiary or have it pass into a conduit trust. IRA accounts payable to a revocable trust could also be troublesome unless payable to a conduit or customized accumulation trust. Every beneficiary designation situation is unique and may need to be modified based on changing circumstances.
What considerations need to be made if a beneficiary has diminishing capacity?
John and Mary have their children listed as equal beneficiaries of their estate. Their daughter has a condition which will lead to her eventual mental incapacitation. Programs such as Medicaid and Supplemental Security Income (SSI) may be a resource for her in the future. These programs disqualify individuals who have over a certain amount in income and assets. In this case, John and Mary may want to consider establishing a “special needs trust” for their daughter. There could be less chance of her being denied benefits, and a trustee can then be appointed for their estate.
How should we plan for probate?
John moved assets into their revocable trust when it was first created, but has since acquired new assets which have not been updated to go into the trust. If John were to pass, these assets may be subject to probate court proceedings if they were not titled in their trust. While trusts are often set up to avoid any problems with probate, in some cases, probate may be advantageous. During probate, creditors are notified and given a set period of time to make any claims of repayment. If they fail to do so in that time frame, they cannot do so later, and the assets may be safe to pass to beneficiaries. How easily the probate process proceeds can depend on your geographic location.
Plan Ahead to Avoid Problems Down The Road.
Overall, one of the most important steps that John and Mary could take to ensure that their asset titling matches their estate plan is to review it consistently. Over time, life circumstances tend to change and it could prevent problems down the road if they are addressed early on. While many accounts are opened with an intent to update beneficiaries in the future, a sudden life-altering event could leave your heirs without any access to those assets. Meeting with an advisor and an estate attorney to review how your assets are being designated could prevent future obstacles for you and your family.
Investment advisory services offered through Ciccarelli Advisory Services, Inc., a registered investment adviser independent of FSC Securities Corporation. Securities and additional investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trail North, Naples, FL. 239-262-6577.
