Your Trust Is a Great Estate Planning Vehicle, but if You Fail to Transfer Your Assets to It, Any Benefits Could Wind Up in the Ditch
People establish revocable or irrevocable trusts as part of their comprehensive estate plans for many reasons. Perhaps the most significant benefit of a trust is that all the assets transferred into it are not considered part of the decedent’s probate estate. If all of your assets are in your trust, your trustee can manage and distribute them per your wishes after you pass away while sparing your assets (and any appreciation of those assets) and your family from the expensive, time-consuming, and frustrating probate process.
However, a trust can only operate and administer assets transferred to it either during the grantor’s lifetime or according to a “pour-over” provision in a will. Unfortunately, too many people take a “set-it-and-forget-it” attitude regarding their trust. That is, they establish a valid and enforceable trust but fail to take the steps needed to transfer their current assets and any later acquired assets into their trust. And as a recent Michigan Court of Appeals decision illustrates, that unfortunate oversight can render a trust effectively worthless as an estate planning tool, defeating its purpose and the goals of the person who created it.
Schaddelee, Jr. vs. Deleon involved an irrevocable trust created by Ronald Schaddelee. In addition to the underlying document establishing the trust, he signed a Declaration of Trust Ownership (Declaration), which is a list of assets or potential assets that will flow into the trust. While the Declaration outlined general categories of types of property that would flow into the trust, such as bank accounts, money market funds, securities, etc., it listed no specific properties or assets.
After Schaddelee’s death, the trustees of his trust claimed that a bank account that named a beneficiary was part of the trust’s assets because of the Declaration. However, the Court of Appeals held that the Declaration did not actually transfer assets to the trust. Rather, it only showed the grantor’s intent to transfer general property categories he might own and expected to flow into the trust. Therefore, because there was a beneficiary designation on the bank account, the court ruled that the bank account was not part of the trust assets.
In its decision, the appellate court quoted the probate court, which came to the same conclusion:
The declaration of trust ownership is a statement, a representation that he’s making, saying this is what I think I own. But such declarations can be wrong and have been wrong many times in the past. And this is why every good estate planning attorney, upon the completion of the estate planning and creation of the trust, will tell their clients: Now you need to go out and fund your trust. And one way you fund your trust is to change the beneficiary designations on all of your accounts, naming the trust as the beneficiary.
In addition to changing beneficiary designations, we recommend changing the title of assets to show the trust as the owner. The bottom line, reinforced by this case, is that while you should be proud that you had the foresight to include a trust in your estate plan, you and your attorney have more work to do after that document is signed in order to get the full benefit of the creation of the trust.
The estate planning attorneys at Maddin Hauser can help you make the necessary changes and transfers to ensure your trust effectuates your goals and protects your family from needless confusion or conflict.