Myth 1: My accounts and insurance have already been taken care of using beneficiary designations.
Although a beneficiary designation form is a simple way to make sure that your account or insurance policy is transferred to your loved one upon your death without court oversight, this strategy can be risky. A beneficiary designation only directs what happens when you die. Without a proper estate plan, should you become unable to manage your financial affairs while you are still living, your named beneficiary will have no access to the account for your benefit without court intervention.
Also, a beneficiary designation transfers everything to the beneficiary in one lump sum. If the beneficiary is a minor, court involvement may be needed to monitor the account because a minor child cannot own anything in their name. If the beneficiary is bad with money, the money in the account could be spent quickly. Lastly, if the beneficiary has any pending lawsuits or creditors, the account or property could be taken by a successful litigant or creditor.
Question 1: Can I transfer everything I own to a trust to maintain my privacy?
While most things can be transferred to a trust during your lifetime through a process called trust funding, there are some items or assets that cannot be transferred to a trust. First, your retirement account must be left with you as the individual owner of the account, and you then name a beneficiary to receive the account proceeds when you pass away. The beneficiary may be a spouse, child, charity, other individual, or your trust, depending on your situation. The account is transferred through a beneficiary designation. If the designation form is properly filled out, the transfer will not have to go through probate, protecting your beneficiary’s privacy.
Second, the vehicle you own and use for everyday transportation will likely be left out of your trust. Having a trust own this type of vehicle could make you a target of litigants, should you get into an accident and they see that a trust owns the vehicle. Most states have a way to transfer your vehicle at your death to your next of kin without court involvement.
Lastly, if you own a business interest, you may be prohibited from transferring it to a trust depending on the type of interest it is (stock, membership interest, partnership interest) and the terms governing the interest in the business’s operational documents. However, the business’s operational documents can direct what happens to your business interest at your death, and the transfer of the interest may occur outside of probate, maintaining your privacy.
Question 2: Will a revocable living trust protect my assets?
A revocable living trust is a great foundational tool to save time and money and maintain your and your loved ones’ privacy after you become incapacitated or die. However, because you, as trustmaker, would typically serve as the initial trustee and have the power to change or revoke the trust, there is little that can be done to shelter the trust’s accounts and property from your personal creditors. The trust is merely an extension of you.
If you are concerned about protecting your accounts and property from your creditors or lawsuits, there are other types of trusts that can be used. These trusts would typically have someone else act as trustee and restrict the amount of authority you have to manage the trust’s accounts and property. In some cases, the trust may even restrict your ability to benefit from the trust’s property. Protecting your accounts and property usually requires that you give up control, so you must think carefully before implementing this type of strategy. It is also important to note that if you know that you will be a party to a lawsuit or have a creditor trying to collect a debt, it is too late to move money and property into a trust. Asset protection tools need to be put in place before any troubles occur, or else you could be guilty of making a fraudulent transfer in an attempt to defraud creditors.
For more information, contact our office and schedule a meeting.