Last Chance for Your Parent's Estate Plan

I write about this often, but I do so for a reason. If you have older parents, you need to make sure their living trust estate plan is up-to-date and funded. Too many older people, and their adult children, assume their estate plan is just fine, when it's not.

Here are the most important things to look for in your parents' estate plan.

1. Is Their Living Trust Funded?

One of the main reasons for a living trust is to avoid the costs and hassles of probate. California probate is a pain and very expensive. Read more here.

A living trust avoids probate because the living trust owns the assets that would otherwise go through probate: real property and large bank and investment accounts. However, if the trust does not own those assets, probate is coming.

Having a living trust is not enough. The probatable assets must be transferred to the trust. This is called "funding your trust."

Real Property. A deed must be prepared and recorded to transfer title of your parent's home to the trust. Back in the day, when mortgage interest rates were dropping, it was common to refinance. But during a refinance, title was often transferred out of the trust and back into the owner's name. You and your parents may think their home is titled in their trust, but it may not be. Check. Pull a copy of the current deed or check the property tax bill to confirm the trust is the owner.

Bank Accounts and Investment Accounts. The California threshold for probate for personal property is $ 184,500. If accounts not titled in the living trust are worth more than $184,500, they may be subject to probate. Brokerage accounts and large bank accounts should be titled in the living trust.

We've seen this scenario all too often: 

The surviving spouse died with a living trust, but her home and rental property were titled in her and her deceased husband’s name - and not in the living trust. Oh oh. Probate.

This scenario usually results in probate ... unless:

If she had a written document, like a Schedule of Trust Property (see #2 below), that evidenced their intent to transfer the properties to their living trust, we could file a Heggstad petition with the probate court to request the court to order the properties to be included in the living trust.

A Heggstad petition is a petition the successor trustee can file in probate court to seek an order from the judge confirming that the assets listed on the Schedule of Trust Property are to be included in the trust. If the court grants the petition, no probate is needed. But the court can only grant the petition for assets identified in a Schedule of Trust Property or other writing showing the grantor's intent to transfer the assets to the trust.

A Heggstad petition is much faster and way less expensive than probate. But if there is no writing showing intent to transfer the assets to the trust, the family is looking at probate.

While probate is expensive, it can easily be avoided if your parent takes action now while they are still competent and alive.

2. Schedule of Trust Property

The living trust should include a Schedule of Trust Property which lists the intended trust assets. The Trust Schedule should identify the real property addresses, bank names, financial institutions, business names and any other probatable assets. And it needs to be up to date.

If the probatable assets have not been transferred to the trust, the Schedule of Trust Property can be used to avoid probate with a Heggstad petition. 

3. Beneficiary Designations on Retirement Plans and Life Insurance

Retirement plans like IRAs and 401ks and life insurance policies aren't transferred to the living trust because they will be distributed to the designated beneficiary. However, if there is no designated beneficiary, the retirement plan or life insurance death benefit may have to go through probate.

Retirement Plans. Most married couples name each other as primary beneficiary and their children as contingent beneficiaries of their retirement plans. Most single people name their children as primary beneficiaries and other family members, friends, or charities as contingent beneficiaries. People with no children often name family members, charities, or friends as their primary and contingent beneficiaries.

Life Insurance.  Naming the primary beneficiary of life insurance policies is similar to naming retirement plan beneficiaries. However, we recommend naming the living trust as the contingent beneficiary of life insurance policies.

Sometimes an older parent whose spouse has died fails to update the beneficiaries on his retirement plans and life insurance, and this could result in probate:

Husband named his wife as primary beneficiary of his retirement plan and life insurance, but he failed to name a contingent beneficiary. When his wife died, he no longer had a beneficiary. Then when he died, since there was no designated beneficiary, the retirement plan or life insurance had to go through probate.

The beneficiary designations on retirement plans and life insurance policies must be kept up-to-date.

4. A/B Trust Provisions

Many married couples have living trusts that include an A/B trust (bypass trust) provision. This provision mandates the surviving spouse to allocate the deceased spouse's share of the trust assets to an irrevocable B trust, aka bypass trust, and to allocate the surviving spouse's share to the survivor's trust. 

The bypass trust requires ongoing administration and tax reporting, and the assets in the bypass trust will be subject to capital gains tax.

• The bypass trust will require its own tax id# (EIN), and all the bypass trust assets must be managed under that EIN.
• The bypass trust will require its own trust tax return (form 1041) to be filed each year.
• The assets in the bypass trust will not receive a step-up in tax basis when the surviving spouse dies. 

For these reasons, unless they have a large estate well beyond the estate tax exemption (currently $13.99 million), most people don't need a bypass trust. But if the trust requires the funding of a bypass trust, the surviving spouse may be stuck using it. Read more here.

This is only an issue for married couples.

The good news is if both spouses are alive, they can amend their trust to remove the A/B trust provisions.

5. Living Trust Beneficiaries

Are the people named as beneficiaries of your parents' living trust still the people they want to receive distributions of their assets, or have one or more of them died or faded from their lives?

6. Successor Trustees and Agents

Are the people named as successor trustee in your parents' living trust, executor in their pour-over will, and agents in their durable powers of attorney and health care directive, still competent and alive? And if so, do your parents still want those people in charge of their trust, finances and health care decisions?

We had a case where the decedent named his brother as successor trustee. Some time later, he and his brother had a falling out because the brother cheated him on a business deal. However, the decedent never removed his brother as his successor trustee. And when he died, his brother tried to seize control of his trust. But the decedent's children were wise to their uncle's schenanigans, and knew he would try to cheat them, so they went through the formal process of removing him as successor trustee.  It would have saved a lot of time, effort, and anxiety if the decedent had updated his estate plan.

When Should Your Parents Review and Update Their Estate Plan?

The short answer is: now. Don't wait. The older they get, the more difficult it is to amend an estate plan. And even if they finally schedule an appointment with their attorney, it may be too late. We always have to evaluate whether older clients are still competent. If not, no beuno. We can't update an estate plan for someone who is no longer mentally competent.

I've taught our attorneys to be very careful about amending living trusts for older clients. Even if the client is mentally competent, the older he or she is, the more vulnerable the estate plan can be to challenges by disgruntled heirs or beneficiaries alleging the person was no longer competent or was subject to undue influence.

We often will not even accept a case if the potential client is very old and wants to make significant changes to their trust - too much can go wrong when the person dies and the trust is challenged.

Make sure your parents don't wait until they can no longer walk into the attorney's office before they review and update their estate plan. And if they think their neighbor is a Russian spy, it may be too late.

If your parents’ living trust estate plan is not up-to-date and funded, you and your siblings will be stuck with the consequences. Don't let them wait until it's too late. 

BTW, this doesn’t just apply to your parents’ estate plan. You should also make sure your living trust estate plan is up-to-date.