This is the last post in our in-depth series of trusts and why and how to include them in your estate plan. For prior topics, click here. We were last discussing common mistakes we see in the establishment of trust instruments. Our last post examined failing to fund the trust. The next topics surround beneficiary designations and policy titling.
No. 3 – Unintended beneficiaries of retirement accounts and life insurance policies
Trust funds include life insurance proceeds and other accounts and policies payable to beneficiaries. If those accounts and policies do not properly designate your trust as a primary or contingent beneficiary, then those funds will pass to the beneficiary directly, disregarding any of your instructions from the trust document. The result of the distribution may be that your beneficiary receives more or less than you attended or sooner than necessary, defeating the purpose of the establishment of the trust.
No. 4 – No insurance coverage for your home
Many people retitle ownership of their primary residence into a trust. When that happens, many former homeowners forget to seek retitling of the homeowner’s insurance to name the trust as the insured not you individually. Any claim that may be submitted to the insurance company following catastrophe or damage may be denied because you are not covered by the policy. The trust not you own the home, any insurance proceeds will only be distributed to the trust.
If you retitle ownership of a primary residence to the name of your trust, the trust should be named as an insured on your homeowner’s (and umbrella) insurance policy. Even if you do not retitle your primary residence into the name of your trust (perhaps it is held as tenants by the entirety), your trust should still be a named insured since you transferred (or should transfer) your tangible personal property into your trust.
Changes to U.S. Tax Code
On January 1, 2018, changes were made to the U.S. Tax code. The most significant change was doubling the federal estate tax exemption to $11,400,000 for a single person or nearly $23,000,000 for married couples. Make sure any existing trust is updated to take advantage of the new tax laws.
Estate taxes are notoriously high. Make sure you have transferred assets at a similar value. The IRS frowns upon land sale transfers for $1 and will tax you anyway at full market value. Estate tax planning is part of establishing a will, trusts, and other end-of life planning instruments.
A final note on minor children
Make sure your will and trusts documents are updated to include all of your children. Many people create a will and forget to update it when a new child is born or worse, plan to update their estate documents but put it off until it is really late. We touched upon the appointment of a guardian to handle your financial affairs should you become incapacitated in our last post. The same is true for children. Identify a guardian, explain your instructions, provide guidance on how and when you wish your children to access monies from the trust or your will.