You may think that a California Will or Trust controls the distribution of all your assets after your death. You may be surprised to learn just how meaningless a Will or Trust can be depending on how your assets are titled.
When a person is alive, his assets are viewed as belonging to him. When that same person dies, however, his assets suddenly become separated into distinct legal entities that may have nothing to do with one another. And each legal entity has its own set of rules and procedures governing its distribution.
For example, let’s say you have one living parent (we’ll call her Mom), she has three children and she owns the following assets:
- House—A home titled in the name of her revocable Trust, which lists all three children as equal beneficiaries,
- Bank Accounts—A checking and savings account at Citibank titled jointly in her name and her oldest son’s name (we’ll call him Adam),
- Brokerage Account—A brokerage account titled jointly with her youngest son’s name (we’ll call him Bob),
- Retirement Accounts—An IRA and 401(k) with all three of her children designated as equal beneficiaries, and
- Life Insurance—that names her only daughter as the sole beneficiary (we’ll call her Cindy).
While Mom is alive she can do whatever she likes with her assets. She can open and close accounts, she can move money into or out of her revocable Trust, she can even name different beneficiaries for her life insurance policies. It’s all just one big pot.
But when Mom dies, things change. All of the various assets become essentially locked into whatever state they were in prior to Mom’s death. And each entity has its own, independent distribution scheme.
That means, for example, that the assets will pass in different ways:
- House—passes to the three kids equally under the terms of Mom’s revocable Trust,
- Bank Accounts—pass to Adam ONLY, because he is the surviving joint tenant (neither the revocable trust nor any Will control this asset after Mom’s death),
- Brokerage Accounts—passes to Bob ONLY as the surviving joint tenant,
- Retirement Accounts—pass under the beneficiary designations to the three children equally, and
- Life Insurance—passes to Cindy ONLY as the sole named beneficiary.
Even if Mom had a Will, the Will would not control any of these assets because none of the assets are passing under Mom’s estate. They all bypass the estate because the assets are held in so many different probate-avoidance vehicles. In fact, even the revocable trust controls very little of this estate—the House only. Since the other assets were not titled in the name of the Trust, none of them pass in accordance with the Trust terms.
Mom may have thought that ALL of her assets would be divided equally among her children because that’s what her revocable Trust stated. But Mom couldn’t be more wrong. When setting up accounts in a certain form—such as joint tenancy or assets with designated beneficiaries (like life insurance and 401(k) accounts)—those forms control the assets after death. In other words, the title to an asset has significant legal meaning after death. Yet so many people create things like joint tenancy accounts without fully appreciating the consequences of their actions.
Further, if you are going to contest how an asset passes, then you better know which legal entity you need to go after. If you sue the Trust based on an asset that does not belong to the Trust, then you’re going to waste a lot of time and money going down a deadend road.