Beneficiaries of a Trust believe that when a loved one dies, and they are named as beneficiaries of the Trust, they will receive their inheritance through the Trust. Sometimes that is true. But very often, if a loved one dies and the Trust says you get everything, why were you disinherited?
The most common reason for you to be disinherited is because the assets were transferred to someone else by operation of law, or because the assets were never put into the Trust in the first place.
The Trust Must be Funded
A Trust is a wonderful estate planning tool. Beneficiaries of a Trust can get their inheritance from the Trust directly from the Trustee. No probate is required. But that only works if the creator of the Trust funds their Trust by transferring the assets into the Trust.
Bank accounts are renamed in the name of the Trust. Real estate is transferred by Special Warranty Deed to the Trust. Life insurance is transferred into the Trust when the Trust is named as beneficiary. If the assets are not transferred in properly, there is nothing in the Trust to give to beneficiaries.
A Trust is like a Box
A Trust is like a box that holds assets for the Trust beneficiaries. The Trust itself spells out the rules of the Box. The rules include the names of the beneficiaries of a Trust, the people who will receive the stuff in the Box.
The Trustee is the administrator, like the organizer of the Box. The Trustee says which bills are paid. Which income tax returns are filed? When the beneficiaries of the Trust can receive their inheritance. If the Box is empty, assets pass to beneficiaries in lots of other ways.
Operation of Law
All assets need to be in the Trust before death. If assets are in the Trust, we never have to deal with the operation of law. If the assets are not in the Trust, we have to deal with the operation of law all the time.
Operation of law means that the asset passes to the beneficiary automatically upon death. The Trust is never used because this happens automatically, before the Trust is read, or the Trust is administered. Operation of Law affects bank accounts, real estate, IRAs and pensions, vehicles, and life insurance.
Bank accounts pass by Operation of Law when the account has a payable on death option. That means that as soon as Mom dies, the bank account passes to her new husband automatically. The Trust cannot control assets which are payable on death.
The bank statement will tell you if the account is payable on death. If it is not payable on death, then there are two more options. If the value of the account is small, the bank may recognize a small estate affidavit. That means that the bank account will pass between Mom’s closest relatives. If your Mom is married, the account will be divided like this:
One half to spouse and One half equally divided between the kids.
If there is a lot of money in the account, the family will have to open a probate. Then if Mom has a Trust, the Trust decides where the money goes. If Mom doesn’t have a Trust then the laws in the state where Mom lives, will make that decision.
Real Estate – Joint Tenancy
If there are no assets in the Trust, the Trustee cannot pay the Trust beneficiaries. Outside of the Trust, real estate can pass automatically in two ways. The first way is called Joint Tenancy with Rights of Survivorship. Joint Tenancy with Rights of Survivorship is a certain type of real estate deed. When Mom bought her house and put her new husband on the title as Joint Tenancy with Rights of Survivorship, one of two things can happen.
One, if Mom dies first the property passes automatically to the new husband. Mom’s children are disinherited. But, if new husband dies first, the assets pass to Mom. Then, new husband’s kids are disinherited. With Joint Tenancy with Rights of Survivorship one side wins and the other side loses.
Real Estate – Beneficiary Deeds
The second way to transfer real estate by operation of law is called a Beneficiary Deed. When Mom buys the property with a beneficiary deed, the deed says that Mom is only owner while he lives. It also says, that if Mom dies the property goes to the beneficiary listed on the beneficiary deed.
You may think that this sounds okay. But it may not be okay if you are Mom’s children. If Mom’s new husband is the Beneficiary on the Beneficiary Deed, then when Mom dies the real estate goes to new husband. Once again, Mom’s children are disinherited.
With joint tenancy Mom’s kids have a chance to inherit the real estate. With a Beneficiary Deed, all chances are gone.
IRAs and Pensions
IRAs and Pensions are owned by Mom during her lifetime. At death, IRAs and Pensions are controlled by Beneficiary Designations. The Beneficiary Designation tells the investment company who gets the IRA or Pension when Mom dies. If Mom chooses her new husband, her children are disinherited.
The message is Trust are wonderful if they are funded. Otherwise, operation of law rears its ugly head. Operation of law means it doesn’t matter what Mom wanted. Mom didn’t do her homework properly, and her kids may end up losing their inheritance.
All of this can be avoided by setting up your estate plan with a qualified estate planning attorney. The attorney will guide the whole family to make the right decisions and sign the right documents so that the correct people get the correct inheritance. That means the Trust beneficiaries will get their inheritance and pay the beneficiaries.
Has your family spoken to an estate planning attorney to make certain you don’t have to tell your lawyer that the Trustee is not paying the Trust beneficiaries? Do you want to lose your inheritance?