Estate Planning: Simple is Not Always Better

Estate planning contemplates two different general time periods: During life and after your death. Estate planning needs also vary based on the goals you are trying to achieve. For example, after death, do you simply wish to transfer your assets outright, or do you wish to provide your loved ones with asset protection, tax protection, divorce protection, or other benefits?

We will look at an estate plan which is very simple, but which does not include a trust.

A simple, common plan without a trust often includes holding title to property in "joint tenancy with rights of survivorship," or simply "joint tenancy." Joint tenancy transfers your property to the other joint tenants at your death. However, while it accomplishes the goal of transfer of the property at your death (and avoids probate), it also puts the property at risk during your lifetime.

With property in joint tenancy, the other joint tenant is an equal owner of the property. This form of ownership might be acceptable with a spouse. But, you'd typically not want your children as equal owners. Further, joint tenancy ownership exposes the property to the creditors of the other joint tenant. For example, let's say you own your home in joint tenancy with your son, Sammy. Let's say Sammy is out late partying and is involved in an auto accident while drunk driving. The others involved in the accident, including Sammy's passenger and the family he hit, all file suit. They get a judgment of $1 million against Sammy. They can collect the judgment against the assets Sammy owns, including your house which he owns in joint tenancy with you. This may not be an acceptable risk.

California allows real estate to have a beneficiary designation in the grant deed. So, if Sammy were the beneficiary rather than a joint tenant, his creditors could not go after the property during your lifetime. However, Sammy's creditors still could go after the property after your death when Sammy inherits the property from you.

A better solution in this case is to hold the property in a revocable trust. First, if you become incapacitated during your lifetime, the trustee you designate could step in to manage the assets until you recover. Next, the trust could establish an asset protection trust for your beneficiaries after your death. This could provide asset management (if the beneficiary is too young or has a drug\alchol problem, etc.), divorce protection, and creditor protection.

Similarly, you could leave assets such as IRAs and retirement plans directly to your beneficiaries at your death. That's certainly simple. However, those assets would have no creditor protection (at least at the federal level) after your death if you leave them outright to your beneficiaries. You could leave those assets to your beneficiaries in trust. Using the trust "wrapper" you could obtain asset management, divorce protection and creditor protection. Learn more about our IRA Inheritance Trust.

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