Samuel B. Ledwitz has built an estate planning law practice dedicated to trusts and the like. But he is often confronted with this one basic question: What should go in a trust?
“We get that question a lot of times, what should go in your trust?” said Ledwitz, a longtime estate planning attorney and founding partner of The Law Firm of Bezaire, Ledwitz and Associates. “What goes in your trust are typically your bank accounts, brokerage accounts and your house. But then the question comes up, what wouldn’t I put in there? People often think everything needs to go in there and it doesn’t.”
So, over time, Ledwitz has come up with a succinct analogy to easily describe the function of a trust to his clients.
“Your trust is a lot like a swimming pool,” he said. “The contractor builds it, but, you, the homeowner puts water in it. The trust is the same way. The attorney builds the trust, but you have to put the necessary items in there.”
Starting with your bank accounts, Ledwitz said it is quite easy to get them included in your trust once your trust has been drafted.
“You go down to your bank and you retitle your account in your trust’s name with yourself as trustee of your trust,” he said. “Your lawyer should give you a letter that actually spells this out so it is easy and crystal clear. You should also have a trust certification that shows the bank the relevant portions of the trust. That way the bank knows you’re allowed to open up that account. Or if you have an existing account, you can transfer that existing account into the trust.”
And Ledwitz added that should not alter anything with how your bank account currently works.
“On a sidenote, that should not cause a new bank account number or require you to order new checks,” he said. “It really shouldn’t change anything or foul up anything. That’s called the vesting of the trust. You want to get your accounts renamed in the name of the trust in order to avoid probate.”
But what happens if you die and an account is left out of the trust? Ledwitz said it all depends on how much money is in that account.
“If you have an account that’s outside your trust and you’re in the state of California, here’s the question: Is that amount under $166,250?” he asked. “For most people it is. But if it’s not, that’s the amount that triggers a trip to probate court. And you do not want to go there.”
If you have several accounts not in the trust, it’s the total amount of those trusts that could potentially trigger a probate, not necessarily just one account on its own.
“If I have several accounts here and there and here and there, it’s the accumulation of those accounts,” Ledwitz said. “So we’ve got to keep our eye on that.”
In addition to retitling your bank accounts, Ledwitz said it is always smart to make sure your house is still in the trust, especially if you have recently refinanced.
“Another common mistake we get is someone has the house correctly in a trust and then they refinance the home,” he said. “The bank often will take the house out of the trust for their legal reasons, and then they forget to put it back in. That happens a lot. And then after you pass away, there is a need to go to court.”
So, what’s the best course of action for someone to stay on top of these things?
“What I suggest is have the trust and all your accounts reviewed every three years,” Ledwitz said. “Make sure you show your lawyer all your bank statements and your property tax bill so he or she can make sure the word ‘trust’ is written in the correct place. If there’s a problem, you should be able to find out how to fix it. Or if it’s something small, maybe your attorney can just fix it right there.”
In addition, Ledwitz said there are items that are left out of the trust — mainly 401ks, IRAs and annuities — due to potential income tax issues.
“They have something called deferred income tax,” Ledwitz said. “And a trust is a non-qualified owner, meaning they don’t meet the IRS code for the deferment. In a nutshell, you could very well accelerate all the deferred the income tax to due and payable — or due and payable in a shorter amount of time — than if you had just left it out of the trust. We want to always be worried about the income tax factor.”
Persons who would like to discuss any aspect of a proper estate plan can call The Law Firm of Bezaire, Ledwitz and Associates at (626) 398-0100 or log onto www.SmartEstatePlans.com.