Just because you are the proud owner of a revocable trust doesn't mean that your estate planning is complete. In order to avoid probate and the associated time and costs, you must take the deliberate steps of titling all assets properly. Assets like brokerage accounts, bank accounts, shares of a closely held business, royalty payments and real estate must be put into the trust while you are alive in order to avoid probate.
In most cases, your will likely leaves everything to your trust; however, wills must pass through probate. It's not uncommon for people to place most of their holdings in trust but forget about a few assets. Often, it's a seldom-used bank account or shares of a closely held business that get overlooked. In any case, if the assets aren't titled in the name of the trust, those assets must be probated.
Some assets will not be controlled by the trust at all. Assets owned jointly with the right of survivorship pass automatically to the survivor regardless of what the estate planning documents say. Other assets like IRA's, annuities and life insurance will pass directly to the beneficiaries who were designated by the owner at the time the account was opened or by a subsequent change the owner made. Many times, the owner of those accounts will name their trust as the beneficiary. This works well for life insurance contracts as the death benefits are tax free.
However, there are some tax considerations to be aware of prior to naming a trust as the beneficiary of an annuity or IRA. Some trusts do not allow the IRA to be stretched for continued tax deferral and no trusts allow a deferred annuity to be stretched. The annuity proceeds must be distributed over five years if the trust is the owner or beneficiary. In certain cases, it's better to have the annuity or IRA avoid the trust and pass to the beneficiaries directly.
This material is for information purposes only and does not take into account the investment objectives, financial situation or particular needs of any individual.
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