Category Archives: Estate Planning Basics
Dear Liza: My father recently died. My dad had a trust set up naming me as the trustee and my brother, sister, and I are to split my dad’s assets evenly. I have set up a trust account at his bank (B of A) and have funneled funds into that trust account from his other bank accounts. I mailed off claim forms to a few companies in regards to his stock and annuity assets. Met Life is saying that we need an “ESTATE” and it needs to list me as the executor of the estate. She said that an estate and a trust are two different things and they needed an estate not trust. What is she talking about? It sounds like you are doing a good job as Trustee. It also sounds like the annuity at Met Life may not have a named beneficiary, which would mean that is passes to your father’s estate (and not to the trust).
Here’s the overview: your father had certain assets in his trust. But he, like most people, also owned assets NOT held in the trust, most typically these are retirement accounts (like IRA’s and annuities) or life insurance policies which have named beneficiaries.
When a person dies, these assets go the named beneficiaries. But if a person didn’t name a beneficiary, or named a spouse who then died first and forgot to update the form, these assets then usually pass to a person’s estate (though that’s up to each company’s rules).
In California, where I practice, if that annuity is worth less than $150,000, there’s a simple way to get MetLife to transfer it to you, as Trustee of his trust using a Declaration allowed by the Probate Code. If that annuity is worth more than $150,000, though, you will either have to open a probate proceeding and be named as the executor and then work with MetLife to transfer the asset, or use a court Petition to transfer the asset to the trust via his Will (if it was what’s called a Pour-Over Will, which would be typical).
Each state has a similar threshold, called a Small Estates limit. To find out what your state’s limit is, visit Legal Consumer.com and go to the Inheritance Law Section, which I wrote. (Full disclosure). Enter your zip code and you can find out your state’s small estate limit.
The first step is to ask MetLife who the beneficiary of the policy is. Then, if your father didn’t name anyone, you should probably seek professional help to chart the next steps.
Dear Liza: My relative passed away and I am the only surviving close relative. She left a will that listed me as the beneficiary of her real property. Her only assets were a small house tax value, $37,500 and 2 joint bank accounts totaling $20,000.00 with right of survivorship. The property is in North Carolina. Will this have to go through probate? Based on what you’ve told me here (and with the caveat that I’m not licensed to practice law in North Carolina), yes, this estate will need to go through probate because the value of the house ($37,500) exceeds the North Carolina small estate’s limit of $20,000 and you are not the surviving spouse. The two joint bank accounts will pass to the surviving joint owner outside of probate, but to transfer the house you’re going to need a court order, which is what probate ends with: an order by the court transferring the property to you, as the beneficiary under the Will.
If the house was worth $20,000 or less, you could have avoided probate by using North Carolina’s small estates procedure, which lets you use an Affidavit to transfer small amounts of property. But, since the house is worth more than that, you’re going to need to go through probate.
Dear Liza: I’m an executor of a trust and was added as co-trustee on the trust while my mom was alive. She is now at peace with dad. Can I now just distribute the funds per the trust without changing the trust first to an irrevocable trust and providing a new TIN to the credit union prior to the distribution? Sorry. That’s not going to work. Now that your mother is dead, the trust is already irrevocable and you can’t use her Social Security number to report income, that’s why you need to get a new tax identification number for the trust. But it’s handy to have. Here’s why.
From the date of her death to the date that you distribute all of the trust’s funds, any income earned by the trust must be reported under that new tax identification number. Now that the trust is irrevocable, you’ll also need to file a 1041 tax return if the trust earns more than $600 worth of income in a year. Also, you’ll need that tax identification number to open up a bank account in the name of trust, which you can use to consolidate the trust’s assets prior to distribution and to pay its expenses.
And if you are thinking that you will avoid all of this by instantly distributing the trust’s assets, don’t. You shouldn’t just immediately distribute all of the trust’s funds, please wait until you’re sure you’ve paid all of the expenses and taxes due first. If you do distribute all of the assets, and then find a trust liability that you didn’t know about before, you as Trustee, must either personally pay that liability or go back to the beneficiaries and try to get the money back.
To find out how to get an EIN, visit the Inheritance Law section of Legal Consumer.com, put in your zip code, and read the article that explains how to do it. (Full disclosure, I wrote that too).
Dear Liza: Can real estate that still has a mortgage on it be placed in a trust? Yes, you can place real property with a mortgage into a revocable living trust. That is, in fact, quite common. Most people, after all, don’t own their houses free and clear when they set up their living trusts. But transferring real property into the trust does not change your obligation to continue to pay the mortgage–if you don’t pay, they can still take back the house. And, if you refinance the house at some future time, the lender may ask you to take the house out of the trust to get the new loan, then put it back in. This is annoying, but not a deal-breaker. Not all lenders require this, but many do.
Federal legislation passed in the 1980’s (the Garn-St. Germain Depository Institutions Regulation Act) says that the transfer of real property into a revocable living trust does not trigger what’s called a ‘due on sale’ clause in a mortgage–which would allow the lender to demand that you repay the loan in full, as if you’d sold the property to a new owner.
So, to summarize, it’s fine to put your house into a revocable trust to avoid probate, even if that house is subject to a mortgage.
Dear Liza: My Stepmother had a pension, my father was the beneficiary after she died. He made me beneficiary after his death. After he died, I received the pension. Now my stepmother’s sister wants it. She is not a beneficiary. Is she entitled to it? Can she try to fight it? Your stepmother’s sister, based on what you’ve written here, is not entitled to that pension. If she isn’t the named beneficiary, she’s not entitled to the money. It’s that simple. When an account or a pension has a named beneficiary, that beneficiary is the only person entitled to that asset. Period. Unless your father didn’t have the right to name a beneficiary after his death, or was somehow named improperly by your stepmother, no one else but you would be entitled to the money. In other words, if a beneficiary is improperly designated, then that beneficiary designation itself can be challenged. But otherwise, the account holder’s designation of a beneficiary is the last word.
Dear Liza: My uncle recently passed away. He named both my grandmother and myself as Personal Representatives of his Will, with a clause stating that if a guardian is needed to care for his children or their property, he named me and my grandmother. The clause also states that if any of his children are under the age of 21, the guardian shall serve as custodian for his or her property under the Uniform Transfers to Minors Act until she reaches 21. His 17 year old daughter is the sole beneficiary on his life insurance policy form his employer. Will we be able to utilize this policy to assist with his funeral arrangements? I’m sorry to hear about your uncle. And I’m sorry to answer your question with a resounding, “nope!” Your niece is the beneficiary of that life insurance policy, and you, as the custodian for that property, can only use it for her benefit, not for the funeral arrangements of her father. Money left in a custodial account can only be used for the benefit of the minor, not anyone else. You’ll have to find another way to pay for those funeral arrangements.
Dear Liza: My wife and I are are planning to initiate an estate plan soon but we keep running into the issue of how to leave everything to our 28 year old son. He would be the only recipient as we have no other children, but he has no financial proficiency whatsoever and we have no expectations that he will ever achieve any. We we fairly certain that if we just leave anything to him it will be gone in less than five years. I would like your advice on how to handle this situation. So, the first thing that I want to say is that you’re not alone. I work with lots of people who struggle with some variety of this issue. The second thing that I want to say is that it sounds like you have a fairly clear idea of what could happen if you left your son his inheritance outright and free of trust, so trust that.
No pun intended, but actually leaving his money in trust is one option. In your estate plan, you could leave him his money in a trust, and appoint a trusted friend, or a bank, or a financial company to serve as Trustee. The money could be for his benefit, but it would not be invested or distributed by him. That kind of trust could last for his entire lifetime, and, since it would be held in an irrevocable trust, would not be available to his creditors or to his spouse (if he got married). If you hold it in a lifetime trust, though, you should name an institution as Trustee, since your son would likely outlive a trusted friend of your generation. Another option would be to direct your Trustee to purchase an annuity for your son, that would guarantee a level payout over his lifetime. This is a good option sometimes, but if your son had an emergency need, such as medical care, an annuity wouldn’t be flexible enough to address that need.
Dear Liza: My husband and I married in our 60’s and managed our affairs as “yours, mine and ours”. He held his assets in accounts named as his trust. All combined assets were joint accounts, joint tenancy , etc. My accounts are either in my IRA or individual bank accounts in my name only. We contributed an equal amount to our joint accounts every month to pay living expenses. His daughters are trustees of his trust and sole beneficiaries. My husband died last week after a long illness. Do I need to go to probate for the assets NOT named by his trust? I’m sorry about your husband. You won’t need to open a probate if the total value of the assets in his name and not held by the trust are below your state’s small estate’s threshold. In California, where I practice, that limit is $150,000, but it differs state-by-state. To find out your state’s small estate threshold, click here. One important thing to remember is that this total doesn’t include the value of any assets that are held in joint tenancy, those assets pass to the surviving joint tenant automatically, because that’s what joint tenancy means–the surviving joint tenant owns the entire asset, whether that’s a house or a bank account. This total also doesn’t include any assets with a beneficiary designation, such as life insurance or a payable on death account. So, if your husband had only a few small accounts held in his own name that didn’t have a beneficiary or weren’t held in joint tenancy with you, you won’t have to open a probate to transfer them. You will, though, need to follow your state’s rules for small estates– in California, after 40 days, there’s a simple one-page declaration that the executor can sign to transfer these assets. If your husband had a pour-over Will in addition to his trust (which he should have had), these assets would pass to the trust’s beneficiaries, his daughters.