What are your estate planning goals?
• Provide clear instructions for management of your farm and your personal care if you become disabled?
• Make sure everything goes smoothly at your death?
• Minimize professional expenses?
• Reduce or eliminate estate taxes?
• Keep personal information out of the public records?
• Treat your children fairly?
• Assure your spouse is fully cared for first?
• Provide optimum benefits to your heirs, such as empowering trusts, which protect inherited assets from catastrophes like lawsuits and divorces?
If some or all of these are your goals, chances are you may have decided to use a revocable living trust as a planning vehicle. A thoughtfully crafted living trust, carefully maintained and updated for the rest of your life and appropriately administered upon your disability and then death, is the central tool for accomplishing these goals.
Unfortunately, most living trusts fail to accomplish these goals. Most failures boil down to one reason: not titling your assets properly.
Who owns what?
For your estate to follow your living trust-based plan, your deeds should say that your trust is the grantee: Your trust owns the property. Your bank and investment accounts should show your trust as owner. Your grain accounts, equipment and vehicles should be owned by your trust. Your life insurance should be owned by and payable on death to your trust as beneficiary. Individual retirement accounts (IRAs) cannot be owned by the trust, but your trust should be named as beneficiary, and the trust agreement should be drafted to qualify as a designated beneficiary. If you have a limited liability company or corporation, it might own accounts, equipment, deeds, etc., but your living trust must own the LLC units or corporate stock.
Let’s assume you want to accomplish the goals stated earlier. With the help of an attorney, you draft very specific provisions in your living trust agreement to address each. If you become disabled, you will stay in your own home as long as your income permits, and you want your son to farm your land but pay rent that is lower than you would charge a neighbor. On your death, a well-prepared trustee, with enough but not too much professional help, will have authority to take care of tax filings and transfer assets precisely as you intend, without public disclosure in probate court. If you predecease your spouse, most of your assets will remain available to him or her to live on, assuring that your estate tax exemption is fully utilized and protected from a remarriage. When you and your spouse are both deceased, your trust clearly spells out the fair division of the estate: who gets what and why you decided to divide it as you did. Each will receive their inheritance in an asset protection trust, giving them control but with maximum protection from catastrophes that can happen later in their lives.
But what if?
Then you become disabled. If your assets are not titled in your trust, then a guardian may have to be appointed by the probate court to handle your finances and decide how to spend your money on your care. If so, your son can’t rent the ground for less than the going rate.
Upon your death, if assets are not titled in your trust, your family suffers one of two main consequences: If the plan achieves the end results — avoids estate tax, provides for your spouse (but protected from remarriage), is ultimately divided as you intended and delivered with the asset protection advantages you designed into your living trust — it will require significantly more professional fees, time and effort to administer (think probate court, among other things) than if you had properly titled the assets. On the other hand, if your assets pass without a lot of extra fees, time and effort, it will be because they don’t go according to the living trust at all. This happens if you name heirs as joint owners on deeds or accounts, or execute life estate deeds, or if you have individuals named as beneficiaries of life insurance, IRAs and pay-on-death accounts. This form of titling (ownership or beneficiary designation) sends the assets around your trust instead of through the trust.
In summary, when you don’t title the assets as you should, either the desired efficiency for administration of your estate is lost, or the assets simply don’t pass the way the trust says they should. Proper titling is critical, because incorrect titling will trump your trust.
Ferguson owns The Estate Planning Center in Salem. Learn more at thefarmersestateplanningattorneys.com.