What Happens if Aunt Annie’s Revocable Trust Is Not “Funded”?
Aunt Annie had a revocable trust. She has died. Her favorite nephew, Nate, is the designated Successor Trustee and sole beneficiary of the trust. Nate goes to the bank to assume his role as Trustee and gains access to the accounts to begin paying her bills and administering the trust estate. However, the bank manager tells him he needs to go to probate court and be appointed as Personal Representative of her Estate in order to access the bank accounts. He thought Aunt Annie having a revocable trust would avoid probate. What went wrong? Why does her estate still need to go through probate?
To avoid probate, a trust needs to be “fully funded.” This means that Annie’s accounts and assets needed to be re-titled from her individual name to the name of her trust prior to her death. After Annie’s trust was signed, her attorney gave her “homework” that she forgot to do – this included contacting her financial institutions and changing ownership (i.e., re-titling) of all her bank and non-retirement investment accounts to her trust. Each financial institution has their own change of ownership forms that Aunt Annie should have, but did not, complete. As such, at the time of her death all her bank and investment accounts were still owned by her individually and therefore, are now “estate” assets.
Annie’s trust is like putting everything she owns into her bucket. Her assets in this “bucket” are then controlled by the terms of the trust and are distributed accordingly — outside of probate court. However, when assets are left outside the “bucket,” the trust does not control those assets, potentially triggering probate.
After reviewing all the financial records, Nate learns that when Aunt Annie died she owned the following:
Assets titled to the Revocable Trust:
- Home property ($500,000)
- Brokerage account ($200,000)
Policies and Accounts with Beneficiary Designations:
- Life Insurance policy with $25,000 death benefit- primary beneficiary 100% Nate
- IRA with $100,000- primary beneficiary 100% Nate
Bank Accounts titled to Aunt Annie, individually:
- Checking Account ($2,500)
- Savings Account ($20,000)
- CD ($50,000)
- Money Market Account ($70,000)
Aunt Annie has $142,500 in “probate” assets due to the bank accounts. As such, her Will (known as a “pour-over will” for the reason the Will leaves the “estate” assets to her revocable trust) must be submitted to the probate court. Once “Letters” are issued by the Court to Nate (Personal Representative) he will then be able to manage the bank accounts under the Estate. Those estate funds will be then transferred to the Trust to be ultimately distributed to Nate, as sole beneficiary of the trust. Nate will also collect the life insurance and retirement account proceeds directly from the financial institutions by completing their beneficiary claims forms.
Moral of the story? Revocable Trusts by themselves do not automatically prevent probate; the trust must be fully funded. Had Annie funded her trust, Nate would not have to go through probate to receive the bank account funds. If you have a Trust it is critical that you routinely review all accounts, assets and policies to be certain ownership and beneficiary designations are (1) consistent with your estate plan and (2) will avoid probate. If you create a trust you need to remember to finish up the work and fund your trust; don’t be Aunt Annie. It is important that you review the ownership and beneficiary designations on all assets, accounts and policies with your estate planning attorney, tax professional and/or financial advisor to be certain you understand any tax implications for you and your heirs and beneficiaries.
We routinely draft trusts and assist clients with trust funding and post-death trust administration and probate. Call us today at 480-922-1010 or email email@example.com to schedule your complimentary estate plan review consultation.