It’s truly remarkable how many folks want to draft a will to ensure their assets end up where they want them to go after they’re gone, without considering the other methods available for transferring assets. They often inquire about the hierarchy between a will and other documents. As much as I’d love to see legal documents duke it out in some paper-and-ink arena, it’s not quite that simple. Since my documents don’t come to life like characters in an animation, a document battle remains a far-fetched idea. So, let’s explore more practical ways.

This brings us to the topic at hand: the four primary methods of asset transfer, which I’m about to dive into in this blog post.

 

A Will – Your Initial Line of Defense (and Sometimes, the Final One)

A will has control over property that goes through probate, meaning it doesn’t have a beneficiary designation, transfer-on-death, or pay-on-death designation, and isn’t titled within a trust. Typically, a trust is complemented by a will to transfer assets into the trust, but that’s not always the case. While a will is a fundamental document in estate planning, it only governs what happens to specific types of assets.

 

Trusts – They Rule Over What They Inherit

If you opt for a trust, the trust agreement will dictate who receives assets, but only if those assets are titled in the trust’s name. I’ve come across many trust documents where I asked what was placed inside the trust, only to be met with blank stares. Many people mistakenly assume that just creating a trust document and listing the desired assets is sufficient. But to truly place assets in the trust’s name, you need to transfer the title. Real estate requires a deed, investment accounts need change-of-ownership forms, the DMV must be informed about vehicle transfers, and banks should be made aware of new accounts under the trust’s name. This process is known as “funding the trust” and is crucial. Without proper funding, the trust agreement can’t determine property distribution because it only controls assets it owns. Many individuals who think they have it all sorted are caught off guard when an asset isn’t titled in the trust’s name. A well-thought-out estate plan should include a strategy for funding the trust, whether it’s the creator, the attorney, or another party who handles it.

 

Lady Bird Deed, Transfer on Death and Pay on Death

Without a trust to facilitate asset transfer, you can use transfer-on-death or pay-on-death designations to bypass probate and directly allocate assets to a designated beneficiary. Transfer-on-death is typically linked to investment accounts like stocks or bonds, while pay-on-death is associated with bank accounts. Both methods allow assets to transfer to the chosen person without the need for probate and can’t be overridden solely by a will. It’s vital to review each beneficiary designation and ensure they are up-to-date and correctly arranged. Otherwise, an outdated beneficiary could end up receiving the assets.

 

Beneficiary Designations

A beneficiary designation is a means to transfer investment assets upon the owner’s death. These designations are set up for popular accounts like IRAs, 401(k)s, 403(b)s, Roth IRAs, Thrift Savings Plans, life insurance policies, annuities, and similar investments or policies. These designations are part of the insurance contract, ensuring assets avoid probate and specify where the money goes upon the owner’s passing. Many mistakenly assume that a will controls all assets, but that’s not the case with beneficiary designations, transfer-on-death designations, or pay-on-death designations. These determine who inherits these specific types of assets, regardless of what the will states. It’s crucial to align your beneficiary designations with your wishes as outlined in your will.

In Texas, real estate can be transferred using a beneficiary deed. This deed must be signed and recorded while the property owner is still alive, allowing for a straightforward transfer without probate. If certain real estate or accounts have beneficiary designations, those designations dictate who receives the assets.

 

A Real-Life Example

Let me share a real-life story: I had a client whose husband recently passed away. He set up his IRA 43 years ago when he was married to his first wife. When he passed, his second wife discovered that the first wife was still listed as the IRA beneficiary. Despite being the current wife when her husband passed away, she likely won’t receive the full IRA. This oversight in updating beneficiary designations could cost her a significant sum. This unfortunate situation brought her to me, and I had to deliver the tough news that she’d likely get much less than she had planned for.

 

Texas Residents: Secure Your Legacy Properly

Crafting an estate plan that ensures seamless coordination among all your documents requires thoughtful planning. It’s more than just having the right documents; it’s about having a comprehensive plan. If you’re a Texas resident, we’re here to assist you in getting your estate plan in perfect order. Let’s get started by scheduling an appointment today.

A few weeks back, I had a heart-to-heart with a financial planner who’s been sending clients my way for quite some time. In our recent chat, he mentioned the need for asset protections within a trust for a potential client he was planning to refer to me. He brought up the idea of using a revocable trust. These discussions are quite common between us because we have a solid understanding of how to collaborate effectively. However, this particular conversation delved into the depths of estate planning, much like how this blog post goes beyond the basics to explore a more specialized topic. As we talked, I turned to my friend and asked, “What do you mean by asset protection in a revocable trust?”

His response was, “I thought when you place assets in a trust, they’re shielded from creditors and anyone attempting to collect a judgment because the trust has a different name than the individual.” We briefly discussed how merely having a different name wouldn’t offer substantial protection and that creditors could easily discover assets in a revocable trust. I explained that under Texas law, a revocable trust didn’t provide that kind of asset protection. It turns out, the notion that all types of trusts create asset protection is a common misunderstanding.

Throughout all our conversations over the years, my financial planner friend and I had never delved into the specifics of asset protection offered by a revocable trust. I informed him that a revocable trust doesn’t grant immediate asset protection for the person creating the trust. Curious, he inquired, “What’s the point of asset protection in a revocable trust, then?” I clarified that a revocable trust could offer asset protection for the heirs’ future interest in the trust assets, but for current asset protection for the trust creator, an irrevocable trust would be the way to go. It seemed like a vital concept to share with more people, so I decided to put together this blog post.

Everyone’s goals and objectives are unique. The structure of a trust is tailored to what you want to achieve. Asset protection essentially involves creating a legal separation between a person and their assets, thus providing a layer of protection. Irrevocable trusts are ideal for those with a current need, while revocable trusts can offer future beneficiaries this protection. Each approach has its pros and cons, just like any other decision, and we’ll delve into those options in this blog post.

 

Irrevocable Trusts: Current Asset Protection with Trade-offs

If your aim is to safeguard assets from potential future creditors, you’ll need to establish an irrevocable trust. These trusts can’t be altered or amended without court permission and create a legal barrier between you and your assets. As the trust becomes a separate legal entity, you no longer own the assets, making them inaccessible to your creditors. However, the downside is that you lose control and the ability to enjoy those assets.

This loss of control can be a significant drawback. Most people want to maintain control over their assets and use them as they please. Typically, my clients who opt for this arrangement are older individuals seeking to protect assets from Medicaid, nursing home costs, or other long-term care expenses. There are specific time frames and waiting periods to consider when applying for these programs, as discussed in another blog post about advance Medicaid planning. This scenario may not apply to most younger individuals, so it’s wise to explore other alternatives.

Additionally, if you’re currently facing creditors or foresee potential creditors on the horizon, such as being in the midst of a lawsuit, transferring assets to an irrevocable trust won’t help. Such transfers are considered fraudulent and can easily be undone by someone seeking to collect on a judgment.

 

Revocable Trusts: What You Can (and Can’t) Achieve

Transferring assets into a revocable trust isn’t considered fraudulent, but it also doesn’t provide immediate asset protection for the trust creator. If you create the trust, serve as its trustee, and are the primary beneficiary, the assets within the trust are essentially still yours. Although the assets may bear the trust’s name, everything flows back to you, leaving your assets vulnerable to current and future creditors. For debt collection purposes, you’re still regarded as the owner of trust assets.

Nonetheless, a revocable trust can provide asset protection for future heirs and beneficiaries. This is often done to safeguard assets for minor children, beneficiaries with special needs, or in cases where a lump-sum payment may not be advisable. The trust can hold onto assets and disburse them for a beneficiary’s well-being under specific circumstances. For instance, if a person has special needs and can’t manage their finances, the trust can retain assets and allocate them for the person’s care. These assets may not count against them if they’re receiving government assistance subject to asset limits.

A revocable trust eventually turns irrevocable when it’s protecting assets for final beneficiaries in the future. This transition occurs after the trust creator has passed away, turning the trust into a separate legal entity and securing the assets.

In simpler terms: a revocable trust becomes irrevocable when the trust creator passes away, thus providing asset protection.

 

Texas Residents: Which Trust Suits You Best?

The question now is, which trust aligns with your specific needs?

Your requirements for a trust may differ from those of others. If you want to discuss your trust and determine what’s best for you, feel free to schedule an appointment with us. We’re here to help you navigate this important decision.