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You Must Avoid These 3 Mistakes to Avoid Probate

Avoid these three mistakes to avoid probate.

  1. Failure to transfer, by deed, real property into your trust. (We will take care of this. Call 714-846-2888 or email for more information or to begin.)
  2. Failure to transfer your bank accounts and non-retirement stock accounts into your trust.
  3. Failure to confirm the designated beneficiaries of your life insurance policies, 401ks, and IRAs.

Why fund a trust

Most people in California create a trust to avoid probate and provide for the orderly transfer of assets at a minimum cost and effort after death. By avoiding probate court, living trusts save money and time and are not part of the public record. But a person cannot just create trust; the trust must also be “funded.”

An unfunded trust does not avoid probate. An unfunded trust is a common and costly mistake. “Funding a trust” is the transfer of ownership from you to you as trustee of your trust. Assets are transferred into trusts as follows.

Funding Real Property

Deed and Record helps you to transfer your real property from you to your trust. We prepare and record the deed or deeds for real property you now own. Real property acquired by you in the future should be transferred into the trust at closing. If escrow declines to prepare the deed from the former owner to your trust, contact us to have the deed prepared and recorded from you to your trust.

Funding Bank and Broker Accounts

You fund bank, brokerage, and stock accounts by ownership change from you to your trust. You contact the bank and stock brokers. Included in your trust package is a certificate of trust to assist you in changing how your accounts are owned.

Retirement Accounts

Retirement plans, such as 401ks and IRAs, transfer from owner to heirs by designated beneficiary form. Contact your plan administrator for currently designated beneficiaries. If a change is needed, ask for a change in the designated beneficiary form.

A trust is not needed for retirement accounts. But a trust is an allowed designated beneficiary. The problem with a trust beneficiary is the plan administrator. Many plan administrators and financial institutions throw obstacles in transferring from a decedent’s trust to heirs.

It is more expedient and less of a headache to identify individuals as the designated beneficiaries. For example, designate your trust as the beneficiary if you have a minor child or a child with special needs.

On the first spouse’s death, the surviving spouse “rolls over” the deceased spouse’s 401k or IRA into his or her own IRA. The surviving spouse uses his or her own life expectancy for required minimum distributions. Distributions have become more restrictive for other heirs under the “Secure” Act beginning in 2020.

Before 2020, on the death of a 401k or IRA owner, the beneficiary’s annual required minimum distribution was based on his or her life expectancy. Life expectancy was calculated using IRS actuary tables. Under the “Secure Act,” the required minimum distribution is now over a ten-year period, with some exceptions.

Inherited 401ks and IRAs allow for asset appreciation and are only taxed when your money is removed from the retirement account. The Secure Act shortens the life of inherited retirement accounts to ten years. Failure to take any distributions, or if the distributions are not large enough, will result in a punishing 50% excise tax on the amount not distributed as required.

Life Insurance Policies

Life insurance policies are funded into your trust by a designated beneficiary. A designated beneficiary is a person or trust identified as the payee on the insured’s death. Life insurance companies provide forms for the owner to name or change the designated beneficiary.

Californians prepare trusts to avoid probate. But the failure to fund an asset into a trust may require result in probate.

The Bottom Line

Californians prepare trusts to avoid probate. But the failure to fund an asset into a trust may result in probate.