One of the biggest mistakes I see when reviewing a client's existing estate plan is not really a "mistake" per se. It's more of a "misunderstanding." You see, the client may have the best trust in the world - a quality document that has all the bells and whistles. However, here is the misunderstanding - People think their living trust governs ALL their assets - as if it were a magical document whose pages transcend time and space and govern the distribution of their entire estate - simply by virtue of its existence. Creating a living trust is great. However, that's just part of the process. Now you have to put things IN it! Imagine the living trust is like a bucket. If nothing is in the bucket, then the bucket isn't really serving any purpose.
Here's the truth - A living trust ONLY governs and controls assets that are "in the name" of the living trust. That means the title of the asset is in the trust. For example, instead of a bank account being owned by "John Smith," it would say "John Smith, trustee of the John Smith Living Trust." That literally means the name on the asset has been changed. Now the asset is officially "in the trust" and therefore governed by the trust. Before, it was still in John Smith's name. Some people think that listing their assets in the trust (or on a separate schedule in their estate planning binder) is the same thing as putting assets in the trust. Let me make this very clear - simply listing assets in your trust or on a separate document is NOT the proper method of moving assets INTO your trust.
By simply creating a living trust doesn't magically make it apply to all your assets. After I help clients create their living trust, I explain, "Look, we all know you have a living trust. We've been working on it. We've signed it. We created all kinds of provisions. But here's the problem - the bank DOESN'T know you have a living trust. The country recorder doesn't know you have a living trust. They are not clairvoyant. The president of Wells Fargo isn't going to wake up in the middle of the night and say, 'Oh my God...Mr. and Mrs. Smith created a living trust....we better retitle all their accounts!"
That's something YOU have to do after you create a living trust. You have to go to the bank and change title on your accounts. You have to file new deeds with the county for your real estate (your lawyer can help you with that), etc. You have to put things IN THE BUCKET as noted earlier. You do so by changing title to the asset...not by listing assets on a piece of paper or in your living trust. There is work to be done...the change of title doesn't happen by magic or by good intentions.
Keep in mind some assets will not necessarily be governed by your living trust. They pass by way of a designated beneficiary. Examples of such assets are IRA's, 401ks, and life insurance. When you opened those accounts, you filled out a beneficiary form. That form indicates who gets that particular asset when you die. Those companies don't care what your living trust says. What the form says is what matters. These types of assets are separate from your living trust. If you wrote "Mickey Mouse" on the beneficiary form for the life insurance policy, they are going to write a check to Mickey Mouse when you die. Again, they don't care what your living trust says. In some cases, however, the trust can be the named beneficiary.
Still, no matter how many times I explain this to clients, there is still a huge misperception that what's stated in a living trust automatically governs ALL assets - which is the fundamental misunderstanding I explained earlier in this blog post. Creating a living trust is a great idea in many cases, but it's an even better idea to understand how that living trust works and what it does and doesn't affect. If you have a trust, and you don't understand how it works, what good is that? That's like buying a car without knowing how to drive one.
Feel free to call my office if you have any questions about this blog post or if we can be of assistance with your estate plan. Our number is (661) 414-7100.