So once the estate plan is setup, I wanted to spend a few moments showing you what I show to my clients about how the estate will ultimately pass. So your estate will pass through generally two “funnels” in most cases. If your estate plan is like most folks, you are going to have a living trust as one of the tools in your estate plan. And so some of your assets will pass through the living trust funnel which I am indicating on the screen.
That means that the assets in this funnel are actually titled in the name of your living trust. So for example, if you have real estate, your real estate would not be in your name or somebody else's name. Your real estate would be in the name of your living trust. So if your name is “Robert Smith,” your real estate would be titled in the “Robert Smith Living Trust.” So what else goes in this funnel? Well, we already mentioned real estate, but there is also bank accounts, regular investment accounts, CDs (certificates of deposits in certain banks), credit union accounts, savings bonds. Any basic kind of account would go into this left funnel here…investment accounts as I mentioned, mutual funds, things of that nature.
Now, these things ultimately pass to the people that you have designated as the beneficiaries of your living trust. So when they come out of the funnel, that's where that stuff goes. Now sometimes it doesn't go to those people right away. Sometimes it stays in the trust for a period of time depending on how you set things up.
Now the other “funnel” that your estate will pass through is what I call the “beneficiary funnel.” So what goes in the beneficiary funnel? Well typically, different types of accounts and typically, there are tax deferred accounts, retirement accounts, such as IRAs, 401ks, 403bs, other types of retirement accounts, pension, benefits may also pass by way of beneficiary, which means that you have to contact the HR department where you work or where you used to work and ask them, "Hey, if I have a pension, who is the beneficiary of my pension?" Annuities pass by way of beneficiary and so does life insurance.
Now here are a few wrinkles that I want to discuss with respect to these two different funnels that I have discussed. First of all, you'll notice down here, it says, "As a general rule, assets owned jointly pass to the surviving owner." They do not pass through either funnel. So if you have an asset and you own it with Joe Smith - you pass away, Joe Smith gets that asset. It doesn't matter what you say in your living trust. It doesn't matter what you say in a beneficiary designation. If you own property jointly, joint ownership trumps. The next thing that I want to mention down here at the bottom with these little caveats that I have written on this chart is that assets in the living trust funnel have three major benefits.
(1) They avoid the court system. So anything in the name of your trust doesn't have to go through the court system when you pass away.
(2) Also, anything in your trust is managed by the people that you have chosen as your trustees. And finally,
(3) Assets in the name of your trust are governed by the rules of your living trust.
So the assets in this funnel here, whoever is managing them has to play by the rules that you have outlined in your trust. At the end of the day, your living trust is nothing more than a legal document, an enforceable legal document that states what happens with the assets that are in that particular funnel. Now, the final thing on the bottom here, I want to bring to your attention. Naming beneficiaries on assets trumps what you say in your living trust. So over here in the right hand column, if you put beneficiaries of Joe Smith and Sally Smith, that's who gets your asset.
What you say in your trust or a will is entirely irrelevant to what happens with beneficiary designation. So the beneficiary designation trumps. So the exception to that is if you name your trust as the beneficiary. Now for life insurance (which I've put over in this right hand column), You can certainly name beneficiaries but I often like to make sure that the beneficiary is the trust. So that the life insurance proceeds essentially come through this funnel and go directly into the living trust funnel. So the money from the life insurance policy is made payable to your living trust. Your living trust is the “beneficiary” of the life insurance money. And that is sometimes a very good idea when you want that money to sit in this part of the living trust funnel and be managed on behalf of your beneficiaries. So that may or may not be a good idea.
Now with respect to retirement and other tax deferred accounts, I generally like to name human beings. It is usually simpler that way from an administrative point of view and a variety of other reasons, tax benefits etc. So for the most part, unless you have significant concerns about the people that you're choosing, go ahead and name them. That's usually the best way to do it.
And the final thing I want to say about this beneficiary issue is that you make sure you name “primary” beneficiaries and “secondary,” or sometimes they are called “contingent” beneficiaries. And a lot of times, people will find that either they don't have the correct beneficiary, they don't have any beneficiaries, or they only have what's called “primary” beneficiary like a spouse or something. And then they don't have anyone listed second in line, which is known as “secondary” or “contingent.”
And you have to make sure you delineate the percentages. So if you have two children and you want them each to get equally, you should say, "Equally to John Smith and Mary Smith." or "Equally to John and Mary Smith." or "50% to John Smith and 50% to Mary Smith." You need to be specific. And people have run into trouble when they are not specific with their beneficiary designations.
So hopefully this visual will help you understand the two funnels that I often talk about with my clients. If I can be of help to you with your estate plan, please contact my office at 661-414-7100 or visit my website, which is www.mansourlaw.com. That's my last name, M-A-N-S-O-U-R, the word law dot com. Thank you very much and I hope you enjoyed this video.