What Happens to Assets Left Out of Your Trust?
Assets Left Out of Your Trust Can Require Probate
Funding your revocable living trust is just as important as setting up your trust in the first place. So what happens if you overlook this vital step and acquire new assets over the years that you neglect to transfer into the name of your trust? It's useless, at least where those omitted assets are concerned.
The Assets Must Be Probated
If you personally own any property when you die—it isn't yet titled in the name of your trust—probate will most likely be required to transfer it to the name of a living beneficiary. Assets that move directly to a named beneficiary, such as life insurance proceeds or certain types of property ownership, are an exception to this rule.
Your Estate Might Require an Ancillary Probate
Your heirs and beneficiaries might have to deal with two or more separate probate processes if you neglect to fund assets into your trust. If you own real estate in a separate state from that where you own other assets, your loved ones will have to open probate both in your home state and in each additional state where you also own property. Property located in each jurisdiction must be probated according to that state's laws and rules, which can cause a great deal of confusion.
Your Estate May Pay More in Estate Taxes
If all your accounts and property are owned as joint tenants with rights of survivorship, or as tenants by the entirety with your spouse, AB trusts you might have established under your trust can't be funded. This can result in estate taxes that would otherwise not have been due.
Your beneficiaries won't be able to take advantage of important estate and income tax strategies or asset protection if you fail to update the beneficiary designations for your life insurance and retirement accounts to coincide with the terms of your trust before you die.
You May Unintentionally Disinherit Loved Ones
If you own any assets as joint tenants with rights of survivorship with one of your children, it will pass entirely and directly to that child if you don't place your share in the name of your trust. Your other children would not have any legal right to it.
A Conservatorship Must Be Established for Minor Beneficiaries
Minors cannot legally own their inherited property. The successor trustee of your trust can manage it for them until they come of age—but only if you place those inheritances in the name of your trust. Otherwise, an adult will have to go to court and ask to be appointed as your child's conservator so he can oversee this property on his behalf.
A Conservatorship Might Become Necessary for You
Your successor trustee can also step in to manage your trust and your financial affairs for you if you become mentally incapacitated, but he cannot manage assets that are owned in your individual name or as a tenant in common outside your trust. Your loved ones will be faced with establishing a court-supervised conservatorship so they can manage your assets if a time comes when you can't do it yourself.
The bottom line is that if you overlook the importance of funding your revocable living trust, your estate plan won't work as you and your family anticipated. Your trust will be worth only the paper it's written on.
NOTE: State and local laws change frequently and the above information may not reflect the most recent changes. Please consult with an attorney or tax advisor for the most up-to-date advice. The information contained in this article is not legal or tax advice and it is not a substitute for legal or tax advice.