The following is an excerpt from A Parent's Guide to Wills & Trusts: For Grandparents, Too (2nd edition), copyright 2007, 2008 Don Silver and excerpt reprinted with permission.
QUESTION: I just received a promotion and my wife and I will be moving out of state. From all of my job-hopping and what’s going on in the real estate market, we now own houses in three different states. Fortunately, all of our houses are still worth more than what we paid for them. Our other main asset is our stocks. We’re dividing our assets between our children and our grandchildren. Do we need to have our wills reviewed after we move or are the laws the same everywhere?
There are some tax and retirement-related laws that apply across the U.S.
However, the state laws on wills, trusts, inheritance, state income tax, state death tax and state property tax may be different in different states.
So, what might make sense in one state may need to be changed in another state.
Property tax laws may favor real estate left to children, not grandchildren
You are leaving the three houses and stocks to your children and grandchildren. One state, for example, might allow property taxes for your children to be based on what you paid for your real estate many years ago (and not on its higher current market value) only to the extent your children, and not your grandchildren, inherit a house or other real estate.
To take advantage of this real estate benefit, you might change your estate plan to allocate a house in that one state only to your children and a compensating amount of the other assets just to your grandchildren.
HINT: When you move to a new state, have your entire estate plan reviewed to make sure it will produce the results you want in every state where you have assets.
QUESTION: I own my home, a rental property, stocks, bonds, savings accounts and IRAs. I just signed a brand new living trust. I’m so relieved that my estate won’t go through probate—will it?
If all you’ve done is sign a living trust, there’s still a good chance your estate may still go through probate.
Why is that? It’s not enough to just sign a living trust to avoid probate. It takes three steps to avoid probate: (1) signing the living trust; (2) coordinating how you hold title (ownership) to your assets and (3) completing your beneficiary designations so they work with, and not against, your living trust and overall estate plan.
Assets without a beneficiary designation
With some assets you change title by signing separate documents so the owner is the trustee of the living trust or by listing assets in a schedule that’s attached to the living trust document. With other assets, you do not change title—there may be complications if you do so.
For example, you may be one of the owners in a business where the agreement between owners restricts transferring ownership interests. Or, you may own real property (other than your principal residence) that has a loan on the property. Unless you get prior consent from the lender, a transfer to a living trust may trigger a due-on-sale clause that would make the loan all due and payable at the time of transfer. Oil, gas and mineral royalties, annuities, partnership interests, leaseholds and other assets may require special attention. Transferring a car to a living trust might present insurance issues. Get advice.
State law may determine the right course of action. For example, some states have special creditor protection through a homestead exemption (this is different from the homestead tax exemption that lowers property tax). This creditor exemption may be lost if title were transferred to a living trust. Your best bet is to get advice on transferring your assets before you make any transfers.
Assets with a beneficiary designation
In general, you do not transfer ownership to the living trust on assets that have a beneficiary designation (e.g., retirement plans and IRAs). The way you can avoid probate on those assets is by naming a primary and secondary beneficiary to make sure someone survives you to receive the assets.
It is generally not a good idea to name your estate as the beneficiary. If you name your estate as a beneficiary, then you’re asking for a probate of the asset. Probate means extra fees, delays and exposure of assets to creditors.
For life insurance, you may want to change ownership to a different kind of trust—an irrevocable life insurance trust.
HINT: Asset transfers and beneficiary designation changes may sound easy to do but there are often tax and other minefields just waiting for you to take a misstep. That’s why you should get advice before doing any asset transfers or beneficiary changes.
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