The Risks of Leaving Your Bank Accounts Outside Your Revocable Living Trust

Clients spend a significant amount of time carefully constructing their revocable living trust. They review their beneficiaries, select their trusted successor trustees, add important tools designed to protect their loved ones, and include comprehensive tax-planning provisions designed to preserve assets from avoidable taxes.

However, one mistake can cause extensive problems to this detailed plan. While many people understand that real property should be retitled to a revocable living trust, they frequently do not prioritize updating their accounts, including checking accounts, savings accounts, money market accounts, certificates of deposit, brokerage accounts, mutual funds, and stock shares. For Oregon couples whose trusts include estate tax planning provisions, this oversight can be particularly costly.

Your Trust Can Only Control Assets It Owns

A revocable living trust can be the title owner of certain assets during your lifetime. Upon your death, your successor trustee manages and, eventually, distributes those assets according to the instructions you put in place.

If an account remains titled solely in your individual name, that account is generally not governed by the trust. Your Trustee does not have authority to manage that account. Instead, it may pass through probate or by some other ownership arrangement or beneficiary agreement outside the trust structure. This could create a disconnect between the plan you signed and the assets you own.

Impact During Incapacity

During a period of incapacity, a properly funded revocable living trust gives the trustee the critical authority to manage assets. 

Your successor trustee can step in and handle trust assets without the need for a court-appointed conservator. But, if your accounts remain outside the trust, your successor trustee will have no authority over those assets. Your family may instead need to rely on other legal documents or even the court to create that authority. Funding your trust helps ensure that your incapacity plan works when it is needed most and supports your Trustee stepping in to access and manage your resources according to your instructions.

Oregon Estate Tax Planning Can Be Undermined

Oregon has one of the lowest state estate tax exemption amounts in the country. Many families who will never owe federal estate tax may still face an Oregon estate tax bill. As a result, many married couples use revocable living trusts that contain tax-planning tools and strategies designed to capture both spouses’ Oregon estate tax exemptions, which gives families substantial tax savings.

These provisions often require assets to be available inside the trust at the death of the first spouse, so they are accessible by the Trustee to use in the tax reduction process. Depending on the structure of the plan, the trust may divide into separate subtrusts or create protected shares that preserve estate tax benefits for the surviving spouse and family.

If bank accounts or investment accounts remain outside the trust on the death of the first spouse, those carefully drafted provisions may not operate as intended because the assets are not in the trust and available to implement the plan. Instead, assets may pass directly to the surviving spouse or other beneficiaries, potentially wasting planning opportunities that were built into the trust document. For some families, this can mean a tax bill of over $100,000 that could have otherwise been avoided. 

Probate May Be Required

One of the primary reasons people establish a revocable living trust is to avoid probate. However, assets titled individually at death may still require probate administration if no beneficiary designation or other transfer mechanism exists.

Avoiding probate requires proper trust funding. If significant cash accounts remain outside the trust, your family could find themselves dealing with a probate proceeding despite having created a trust specifically to avoid the court system.

How to Avoid Improper Trust Funding

After your trust is signed, work with your attorney and financial institutions to ensure that appropriate accounts are retitled into the name of the trust. Periodically review your assets to confirm that newly opened accounts are also properly coordinated with your estate plan.

For married couples with Oregon estate tax planning provisions, this step is especially important. The effectiveness of the planning often hinges on the trust owning the assets that the trust is intended to control.

When bank accounts remain outside the trust, your family may face unnecessary probate, administrative headaches, and missed tax-planning opportunities resulting in payment of tax that was otherwise avoidable. For Oregon residents whose trusts contain estate tax planning provisions, failing to fund bank accounts can undermine some of the most important benefits the trust was designed to provide.

It’s important to understand that naming a Power of Attorney or adding a co-owner to an account is not the same as having the trust own the asset. Naming the trust as beneficiary on an account is also not the same as having the trust own the account, and can strip a well-made plan of the key tools intended to save on taxes. Proper ownership and beneficiary designations are critical to ensuring your trust functions as intended.

If you have a revocable living trust, now is an excellent time to review how your assets are titled and whether your trust has been fully funded. Our office can help you evaluate your existing estate plan, review asset ownership, and identify any gaps that may prevent your trust from functioning as intended. Taking these steps today can help ensure that your plan works efficiently and effectively when your family needs it most.