Asset Alignment

Many clients believe that an estate plan is all about the legal documents, which usually consist of a will, a revocable living trust (for those with any degree of net worth), durable powers of attorney, health care surrogates and living wills among others. Upon completing their estate planning documents, many consider the job done and that there’s nothing left to do for years.

Did you know, however, that you can have the best estate planning documents ever drafted by the best attorney who ever practiced and yet your estate plan might fail?

One reason for the failure is the improper alignment of your assets inside of your estate plan. What do I mean by that? It might relate to several things, each unique to your situation.

If you have a revocable living trust, for example, it is vitally important that your assets are actually titled into your trust. Many attorneys provide their clients a “funding instruction sheet” that details how accounts are to be titled. Rather than an account titled in my name, “Craig Hersch”, instead it should be titled into my trust: “Craig Hersch, Trustee for the Craig Hersch Trust dated June 15, 2018”.  Failure to transfer the assets that would have otherwise been subject to the probate process could result in a failure of the estate plan.

So if you have a revocable living trust should all of your assets be titled into your trust? The simple answer to that is “No” when you own IRAs, 401(k)s, and annuities, for example. Generally speaking you can’t transfer title of those accounts without withdrawing the account balances triggering income tax and potential excise tax penalties depending upon your age.

Should those assets instead name your trust as the beneficiary instead of individuals? It depends. If you want to protect those distributions from the reaches of predators and creditors, then perhaps. Whenever you name a trust as the beneficiary of a tax-deferred account, you must be mindful of the “identifiable beneficiary” rules associated with the required minimum distributions that your beneficiaries will have following your death.

What about annuities? Should those designate a trust as a beneficiary? Again, it depends. The rules governing qualified annuities that are a part of your IRA are treated differently than are non-qualified annuities that are typically held outside of a qualified retirement account. The annuity contract provisions will also be determinative, as non-persons (trusts) often don’t have the same distribution options following the annuity owner’s death.

Asset alignment is important for closely held business interests. If you own shares of a Subchapter S Corporation, for example, you will want to ensure that your trust provisions meet the “Qualified Subchapter S Trust” requirements found in the Internal Revenue Code, or you may risk defeating the S election, resulting in a federal corporate income tax on all of the shareholders that otherwise wouldn’t apply.

Further, if your closely held business, whether it’s an S Corporation, C Corporation, LLC, general or limited partnership may have operational/shareholder/member/partnership agreements that govern the disposition of those interests in the event of your disability or death. Accordingly, for your assets to align properly your estate plan should synchronize with those agreements.

For those married individuals or those with minor children who have declared homestead for their Florida residence, yet another asset alignment issue exists. If you haven’t updated your documents to Florida law, your homestead might be invalidly devised within your estate plan. The proper title to the residence should be accomplished with a deed that integrates with your estate planning documents.

Similarly, if you have been divorced and your dissolution of marriage agreement contains dispositive requirements governing assets, it’s necessary for the estate plan to satisfy those requirements and that the assets meant to so satisfy are properly titled and accounted for.

I could go on. Commercial properties that have tenants, vacation cottages, and non-traditional assets all often need to be titled properly for the estate plan to satisfy your intent.

Even if you’ve done an exemplary job of aligning your assets, and ensuring that they are all titled correctly, the task is often incomplete. Your assets change over time. You might open a new brokerage account, or your broker may have consolidated accounts resulting in new account numbers not aligned with your estate plan.

Your broker may have transferred to a different firm. When you followed the broker over, did you ask your estate planning attorney to verify that the title to the accounts at the new institution are correct? Did you double check the beneficiary designations of the IRAs, annuities and life insurance to ensure that they all fit properly inside of your estate plan?

As you can see, your documents are an important element to your estate plan. It’s equally important, however, to ensure that the assets align properly to your estate plan, and that over the course of time they remain in alignment. If all your estate planning attorney did to verify this was to provide you a funding instruction sheet, then you probably haven’t completed this important step. Most of the new clients that I visit with, even if they have in years past completed their estate planning documents with another firm have failed to properly align their assets.

© 2018 Craig R. Hersch. Originally published in the Sanibel Island Sun.

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Craig R. Hersch

  • Senior Partner,
    • Sheppard Law Firm
  • Florida Bar Board Certified Estate Planning Attorney / CPA
  • Editorial Advisory Board Member,
    • Trusts & Estates Magazine
  • Founder & Board Member,
    • State Chartered Trust Company