Funding is the word attorneys, trust companies and financial professionals use to describe the titling, vesting, ownership and beneficiary designation of property, generally in relationship with estate planning. Funding is critical to any estate plan’s success because the proper ownership or beneficiary designation of an asset directs not only to whom an asset will go when the owner dies but how that asset will get to the ultimate heir.
For example, if you own a bank account in joint tenancy with your daughter. When you die, all of the money in that account will go to the named daughter – even if you have three other children – even if your Will says something else – even if your trust says something else. The account passes to the named daughter by “operation of law.”
Let us assume you have a financial account with $300,000 that is owned in your name as an individual. Also assume you have a revocable living trust and let us further assume that you have listed the financial institution and the account number on a schedule in the back of your trust. If you were to decease, the financial institution will demand a court order before they will release the assets in the account. Neither a spouse nor a child will be able to access the account without that court order. The fact that the account is listed in your trust will not be sufficient to permit the financial institution to release the funds. Now it is possible that your family can avoid a formal probate (that will likely take a year and up to $20,000 to complete) in California with something called a “Heggstad Petition.” However, even if successful it will cost a few thousand dollars and a few months to complete.
Ideally, if you have a trust, the financial account described above would be owned by the trust and titled something like “John Sample, Trustee of the Sample Family Trust dated 1/1/2008.” This would allow the Trustee you have selected to go to the financial institution, present his identification, your death certificate and a copy of the Trust (or certification of Trust) in order to access the account.
Assets like a house, bank accounts, and financial accounts are fairly straightforward in their funding. It gets more complex when you are dealing with life insurance, annuities, retirement accounts and IRA’s. With these assets the ownership doesn’t matter as much as the beneficiary designations. If you don’t designate anyone as a beneficiary there are some defaults. For example, in California the default for retirement accounts and IRAs is your spouse. Otherwise the default provision will cause the funds to go to your “Estate.” In that event, your family will again need a court order, most probably through the probate process to claim the funds.
Closely held businesses are often overlooked in the funding process. Limited Partnerships, Corporations, Limited Liability Companies all have ownership of their interests held in some form, often in the name of the person actively participating in the business. If you own 100% of a company, sometimes informal procedures will suffice. However, if you only own part of a company the transfer of that interest can be problematic if it was not set up correctly. Issues concerning control of the business and its valuation often make transfers of the interest difficult. Many times only a probate proceeding will suffice to establish the proper ownership of such an interest. However, even before ownership is finally established, many companies have lost much or all of their value because of the delay and the confusion following the owner’s death with no clear directive on who has the authority to direct the affairs of the business.
You should make sure your advisory team; legal, accounting and financial; are familiar with your property holdings. Seek their advice as you acquire, transition, sell or refinance your property. They can help keep your estate plan property funded.
Michael E. Garner, JD, CFP®
Cornerstone Law Center, Inc.