Does it matter how you hold title to property?

By Attorney Truman Scarborough

This is the fourth in a series of articles on how an estate plan can be impacted by the way property is titled. In the last article we explored how holding property in a Revocable Living Trust saves time and money by avoiding probate.

Once a trust is established, assets have to be re-titled in the name of the trust to avoid probate.  If you built a shed to protect tools from the weather, your tools would need to be moved into the shed to keep them dry.  In a like manner certain assets need to be placed in the trust to avoid probate. However, there are exceptions. In this article we will look at some examples where it is usually preferable not to title an asset in the trust.

Automobile:  In Florida the owner as well as the driver of the automobile can be sued for an accident.  If the Trust owns the automobile, it could become a defendant in a lawsuit. However, automobiles do not need to be titled in your trust to avoid probate. At your demise, the tag agency (DMV) will immediately transfer the title of your car to whomever you specify in your Pour-Over Will.

Personal checking account:  There can be refund checks payable to a decedent from utilities deposits and prepaid insurance. Generally a bank will not let them be deposited into a trust account. Also, an account that is payable on death will not work, since the decedent’s name comes off the account as it is transferred to the beneficiary.   However, the check can be deposited in the decedent’s joint account where there are survivorship rights. The surviving co-owner can withdraw the funds from the joint account.

Life Insurance Policies: Generally, it is best to have life insurance benefits payable directly to individuals rather than a trust. However, it may not be wise to have the insurance benefits paid directly to a beneficiary with creditor problems, who cannot handle money, with marital problems, who is receiving SSI, or is a minor. Instead, you can create a sub-trust in your revocable trust and name the sub-trust as the beneficiary on your life insurance policy.  

            IRAs: Since no income tax has been paid on funds held in an IRA or deferred compensation plan, transferring an IRA, 401(K), or similar plans into the trust, is considered a taxable distribution by the IRS.

            Furthermore, you generally do not want to name your trust as the beneficiary when you die because it can result in a required distribution of no more than five years. Most people want to delay distributions and the taxes thereon.

            A spouse, as beneficiary, can roll it into his/her own IRA and name new beneficiaries to receive the IRA when the surviving spouse dies. An individual other than the spouse generally must take distributions over a ten-year period.

            If you don’t want an individual to directly receive the funds, you can create a sub-trust in your trust to receive the IRA distributions. Sub-trusts can be structured as “see through trusts” to receive distributions over ten years by providing for a distribution from the sub-trust to the individual beneficiary. This also  avoids the higher income tax rate on trusts. For example, the trust tax rate is 35% on income over $9,851.

For further information you may be interested in Attorney Truman Scarborough’s Booklet on Estate Planning in Florida. It is available without charge or obligation by calling (321) 267 – 4770. His office is located at 239 Harrison Street, Titusville, Florida.