By Atty. Sam Collins
It is common for people in their estate plan to make gifts in certain amounts to specific beneficiaries. As with everything, there’s a right way and many wrong ways to do it (hint: if it is not addressed in your trust, this is a pretty good indication it is the wrong way). Here’s an example that comes up from time to time in some shape or form: William Sample wants to leave $10,000 a piece to his three grandchildren. Rather than amend his living trust, William thinks it will be “easier” to set up three CDs at his local bank and “put his and a grandchild’s name” on each of the three accounts. Sometimes this move is prompted by the helpful advice of the local banker, or even a family member. William was advised that at his death, the CD’s would just “automatically” belong to the grandkids and there would be no need to even address it in his estate plan, especially in light of it being such a small percentage of his estate. Easy, right?
Unfortunately, this derails the planning William did. Here are some problems that arise when people take William’s approach (I don’t claim this list to be exhaustive):
- Perhaps the most obvious, assets left out of your trust are more likely to be missed during settlement. In which case it could be some time, if ever, before the correct beneficiary claims the account.
- In your revocable living trust, you may have (and certainly should) planned for disability. If assets are left out of your trust, additional steps must be taken for your disability trustees to manage the accounts. And virtually any kind of account or asset at some point will require some form of management.
- Presumably you put a lot of thought into whom you trust to carry out your wishes. When assets are left outside your trust to follow another set of instructions there is no one at the helm after you are gone to follow through and see that the asset ends up where it belongs within a reasonable time.
- It will make your trustee’s job harder for tax reporting purposes, should an estate tax return be necessary or advisable. Your successor trustees can readily get information on accounts that belong to or are payable to your trust. But, if the account is payable on death to someone else, only the beneficiary can easily obtain that information. This can create more work for the trustees if they must inventory the estate with taxing authorities and in the worst-case scenario could require court intervention to get the information.
- Banks don’t always get it right. There are several ways (three I can think of at the moment) that a bank can list another’s name on an account, and not all of them would automatically transfer the account at death. We have a process (Red Check Review™) to assure your assets will follow your plan. Bypassing that process leads to problems—otherwise, we wouldn’t do it!
- Assuming the bank did manage to set up the account in a way that will pass on death, it is possible the bank set it up as co-owned. That means any co-owner could potentially invade the account before you die. If this happens, it also risks the account to their creditors.
- It misses benefits built into your plan. If you’ve done any kind of meaningful estate planning, such as providing opportunities for asset protection for the beneficiary receiving from you, creating accounts that go around your trust will miss those advantages. In that case, what good did the planning do? Also, contingencies covered in your planning will not reach the CDs: like, what if the CD beneficiary predeceases you…who ends up getting it?
Things change. Estate planning is not, and never should be viewed as a one-time event. A living-trust-centered estate plan is easily amended and updated to make changes, large or small. There is no reason at all to have any assets “bypass” your trust. Results-oriented estate planning requires that plan be the one and only funnel through which everything flows. Any other approach is a recipe for plan failure.
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