Sand Hill Global Advisors' CIO, Brenda Vingiello, joined Squawk Box to discuss her view on the latest CPI report. This content was produced and providedread more
Do I Really Need a Trust to Avoid Probate?
July 14, 2022
If you have a 401(k), an IRA or a life insurance policy, you’re likely familiar with a beneficiary designation form and how it works. An individual or entity of your choosing can be named to receive your assets when you pass away. You even have the flexibility to allocate the percentage each should receive if you choose more than one recipient. This process avoids probate and is very straightforward if done correctly. A Transfer on Death (TOD) designation works in much the same way for taxable assets, providing a short or long-term solution for those without a trust. Some states, including California, even allow for a Transfer on Death Deed for real estate.
You might be wondering then why you’d even bother establishing a trust if your taxable accounts and home can be covered by a TOD designation and your retirement accounts can be covered by a beneficiary designation form. If you’ve done all that, you’re done. Right? You could be, but before you cross “avoid probate” off your to-do list, there are additional reasons to do a full estate plan and engage with an attorney for their services.
First, TOD accounts don’t cover any personal property such as your car or the contents of your home. Your wishes for who is to receive those assets when you die would need to be covered by executing a will. A will would also be necessary to name a guardian for minor children and to appoint an executor to cover final expenses and file your final tax return in the year after death. Additionally, if your assets go to your surviving spouse by way of a TOD designation, you’ve given them full control over those assets and where they go next. That could be just fine, but it’s important to understand that they could be spent down entirely after you’re gone or passed on to a new husband or wife. This could be especially unsettling if you have children and assumed their surviving parent would provide for them.
Importantly, TOD designations only come into play when you pass away. If you’re alive but incapacitated, you will need someone to step in to help manage your finances and your healthcare decisions. For individuals who’ve established a trust, that role on the financial front is filled by the successor trustee of a trust or an individual with power of attorney. For someone to step into the decision-making role when it comes to your health, you should consider establishing an advanced healthcare directive and durable power of attorney for healthcare. The advanced directive allows you to clearly state your healthcare wishes while you’re able to do so and a durable power of attorney for healthcare gives another individual the ability to execute those wishes on your behalf when you’re unable to do it for yourself.
If you’ve put off hiring an attorney to assist with a full estate plan, a Transfer on Death (TOD) designation could be the temporary solution you’ve been looking for to cover your taxable accounts. Be sure to also check the beneficiary designations for your retirement accounts and life insurance policies to make sure they’re up to date. And because life happens when you’re making plans, don’t put off doing a full estate plan for too long.
Sources: nolo.com, thebalance.com
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