A common misconception is that once you have a will and a living trust in place, nothing else needs to be done in order for your assets to be distributed at your death according to your wishes. The mere listing of an asset in the trust agreement does not make it a trust asset. Actually, assets have to be held in the name of the trustee, (i.e. the title of the asset has to be transferred to the trustee of the trust,) in order for the asset to be subject to the terms of the trust agreement. At the same time, certain types of assets pass by other means, irrespective of whether or not a will or trust is in place. You will want to understand these differences in order to appropriately title your assets to make sure they are transferred as you intend at death.
Here are some of the most common methods of holding title, and how each affects transfer at death:
Types of titles and forms of ownership
1. Sole ownership – Ownership held by a single entity or individual. This asset is transferred based on the terms of the trust agreement, if titled in the name of the trustee of the trust.
2. Joint tenancy. Two or more people hold title with equal rights to enjoy the property during their lives. In the event of the death of one of the owners, the rights of ownership pass to the surviving owner, irrespective of what the trust agreement might say.
3. Tenancy in common. Two or more people hold title with equal rights to enjoy the property during their lives. But, unlike joint tenancy, tenants in common hold title individually for their respective part of the property and can dispose of or encumber it at will. Ownership can be willed to other parties and, in the event of death, ownership of that interest will transfer to the decedent’s heirs. Thus, this method of holding title allows the owner to transfer the property to the trust and be subject to the trust distribution provisions.
4. Community property. Community property is a legal form of ownership by husband and wife during their marriage where they intend to own an asset together. Under community property laws, either spouse has the right to dispose of one half of the property or will it to another party. This category of asset is generally transferred based on the terms of the trust agreement if titled in the name of the trustee of the trust.
5. Community property with right of survivorship. Same definition as that of community property, except when one spouse dies, their interest automatically passes to the surviving spouse. The surviving spouse is then left with a 100 percent share of the property. Thus, the form of ownership determines who it goes to, not the trust agreement.
Examples of assets where title does not govern transfer after death
1. Individual Retirement Accounts (IRAs) and qualified retirement accounts (e.g. 401(k) or 403(b) accounts). These accounts are transferred according to the beneficiary designations indicated on the account, not according to the terms of the will or trust. If no beneficiary has been listed, the account will typically transfer according to the retirement plan document’s default provisions.
2. Life insurance. The payment of a life insurance policy is also dependent upon the designated beneficiary listed on the account.
3. POD bank accounts (payable-on-death). A bank must honor the wishes of their client if they are told who their client would like to have inherit their bank account. The bank must make the transfer upon their client’s death, regardless of what the trust or will might say.
In any of these cases, if the trust is to be the designated beneficiary, the beneficiary designation forms should indicate so. However, local or state laws may prevent transfer of such assets to the trust, so those rules should be taken into account as well.
Asset title also affects the tax basis of property upon death, a critical income tax issue for beneficiaries. For additional information regarding tax basis, please feel free to contact us or speak with your legal advisor.
For a more in depth discussion listen to our latest podcast as Anu Joshi and Julie Malekhedayat from our Family Wealth and Individual Tax Planning Group go into further detail and conversation regarding titling of assets.