The Best Argument for a Revocable Trust – My Mother
Do you really need a revocable trust estate plan? We have no hard and fast rule on this subject because there are additional upfront costs and then continuing costs of a revocable trust plan. The continuing costs revolve around making sure certain assets are in the revocable trust or made payable to the revocable trust upon death. A recent incident with my mother underscores how a properly funded revocable trust can avoid serious financial consequences later.
Mom is 85 years old. Like most retired folks, she is looking for a conservative return on her cash. That means FDIC insured instruments like Certificates of Deposit (CDs). Current returns on CDs are depressingly low, so Mom does not hesitate when she can find an extra .5% at a different bank. In this case, Mom has one CD at a brick and mortar bank. The other CD is at an online bank. While Mom’s son has set her up a revocable trust plan, she has never fully funded it. The CDs are not in the trust.
In casual conversation one sunny afternoon in southern Florida, I ask Mom if she has beneficiary designations on these two, substantial CDs. She is not sure. We look for phone numbers and start making some calls.
The CD at the brick and mortar bank is first. After about an hour on the telephone, we determine that there is no beneficiary designation. Mom wants the beneficiary designation to be her four children (long story involving Dad’s spending habits). Forms are faxed and emailed. Several hours of effort and two weeks later, the beneficiary designation is in place, for now. Keep in mind Mom’s propensity to bounce from bank to bank for a half percent better return.
The online bank CD was surprisingly easy. In about 20 minutes, we determine that Dad is the named beneficiary. We change the beneficiary designation over the phone. All-in-all, I spent several hours over two weeks straightening out the beneficiary designations on just two CDs. What happens when Mom bounces to the next CD? We have a problem. If Mom’s CDs were in her revocable trust, the problem is avoided.
A revocable trust identifies who gets how much when Mom dies. The trust acts a single beneficiary designation for every financial instrument and asset held in the trust. CDs held in a trust do not need a beneficiary designation because the trust does not die. Even if a CD held in the trust has a beneficiary designation, the general rule is that the beneficiary designation on the financial instrument does not override the trust.
A revocable trust simplifies what a person must remember when it comes to beneficiary designations. If the financial instrument or asset is in the trust, the trust document should control.
Many people are financially savvy. These people fully understand how property passes at death and can handle making beneficiary designations on each investment. However, consider the online bank CD example above. Remember that Mom did not want Dad as the beneficiary. Dad was the named beneficiary, which is different from no beneficiary. Somehow, somebody put Dad’s name on the CD as beneficiary. I doubt it was Mom. The point is, even a financially savvy person can make a mistake through omission or oversight.
Many people get easily confused about how property passes at death. We routinely get calls from surviving spouses thinking that the real estate held with the deceased spouse automatically passes to them upon death. That is true when the property is held in joint tenancy but not true if the property is held as tenants in common. For convenience. some parents jointly own a primary checking account with one child with verbal instructions to share with the others. Some parents have just one child making the beneficiary designation less complex. Other parents have stepchildren that they want to treat as their own even though not formally adopted. By placing financial instruments and assets in the revocable trust, the complexities of the family situation are avoided. The trust document should control.
A revocable trust does a good job of simplifying beneficiary designations so long as the property is in the trust or directed to the trust at death. The tradeoff is higher upfront costs to make sure the revocable trust is properly funded along with periodic reviews by qualified estate planning counsel.
Finally, not all financial instruments should be placed in a revocable trust or made payable to a trust. Most can, but tax deferred financial instruments (e.g., retirement accounts) can be tricky. Consult with a qualified estate planning lawyer before transferring property to a revocable trust or making the trust the beneficiary.
