Executing a trust provides you with an orderly disposition of your estate and avoids probate. However, simply setting up a trust will not avoid probate until the trust obtains legal title to your property. This is called “funding” the trust. Once you have executed your trust, it is critical to ensure that all appropriate assets are re-titled into the name of the Trust. And naturally, of course, you cannot have a “trust fund” without any funds!
So what does “funding a trust” consist of?
In general, funding a trust means obtaining new documents of title for financial accounts and property. In some cases, it may also consist of making your trust the beneficiary of insurance policies and employee plans in the event of your death. For most, however, retirement accounts and insurance policies will distribute directly to family members. Feel overwhelmed yet? Don’t worry, a good trust attorney will make it simple.
Now, title to assets you acquire in the future should also be put in the name of the Trust. If you take title to property in your own name individually at any time, you undo the value of the Trust to the extent of that asset. This means that when you buy that third home in Hawaii, you’ll want to title it in the name of the trust too.
In general, if you are a married couple who creates a trust, you might decide to call your trust “The Joe Smith and Jane Smith Revocable Trust.” Assets would then be re-titled to reflect the trust name. The act of re-titling the assets in the name of the trust is the act of funding the trust. And yes, you will then have your very own “trust fund.”
How exactly do you re-title assets to fund a trust?
Each type of account, and each company or county (for property) may have a slightly different procedure for changing title. Here is a general overview of how to re-title assets you want placed in your trust:
BANK ACCOUNTS. I generally recommend my estate planning clients change the ownership of bank accounts to their Revocable Living Trust, and re-title them in the name of the trustee. This means that if one holds a bank account under the name of “Jane Smith,” and she wishes to put it in her family trust, the bank account’s title would change to something like “Jane Smith, Trustee of the Smith Family Trust.” To re-title an account with a bank, credit union, or federal savings bank, it is generally required that you bring your Certification Letter to the bank of credit union. Having a complete copy of the trust on hand is always advisable. In addition, you may also be asked to sign new signature cards as the trustee. In general, transferring bank accounts into a trust is a fairly simple and straightforward task. Also, keep in mind that any existing beneficiary designations will need to be removed from accounts going into the trust. Now that you understand how to place bank accounts in your trust, let’s move on to the ins and outs of Life Insurance.
LIFE INSURANCE CHANGE OF BENEFICIARY FORMS. If you choose to make your trust the beneficiary of a life insurance policy, you must send original, executed change of beneficiary forms to the insurance companies to make the necessary changes of beneficiary to your life insurance policies. These changes are not effective until received and acknowledged by the insurance companies. The purpose of making your trust the beneficiary of an insurance policy would be so that funds are directed by a trustee according to the to the terms of the trust. An outright payment circumvents the protections contained in the trust document.
So, making your trust the beneficiary of life insurance policies may be something you should consider. Make sure to consult with your trust or estate attorney about this one. Now, what about Retirement Plans?
RETIREMENT PLAN CHANGE OF BENEFICIARY FORMS. Retirement plans, including Individual Retirement Accounts and 401K Plans, should not name the trust as the primary beneficiary. Since the trust is not a natural person, the trust would have to take a mandatory distribution of the entire retirement account and pay income taxes currently. Your children or other persons as the “designated beneficiaries” have rollover rights which will defer payment of income taxes. There is a way a trust can mirror the rollover rights which typically belong only to individuals. However, it does make the job of the trustee more complicated, and is not ideal unless beneficiaries of the trust are not seen as being in a position to manage a retirement inheritance.
GRANT DEEDS. A “grant deed” is a term that generally refers to interest in real property. When you execute a trust with an experienced estate planning attorney, they will generally perform the service of re-tiling your real property, such as homes or land. This includes executing a Trust Transfer deed, having it notarized, and sending the deed with other appropriate documentation to the county to be recorded. Attempting to do this without the help of an attorney can be cumbersome and time consuming, and I always advise asking your estate planning attorney if this is a service they provide. When you re-title property in the name of a revocable living trust, there is no reassessment of your California real property under Proposition 13. Yes! Under California Revenue and Taxation Code section 62(d), a “change in ownership” does not include any transfer into a trust, if the trust is revocable. No transfer tax is due because the property has not been sold.
STOCK. The transfer of your stock to the trust must be accomplished by changing title on the stock certificates themselves. If you hold your shares through a brokerage firm, you need change the title on only the brokerage accounts, rather than on each share certificate. If you hold title to your securities directly in your name, however, the stock should actually be transferred to you as trustee of the trust. Generally, your broker can help you make this change for a small charge per certificate. The broker or brokerage may request a copy of the signed trust instrument for examination by their firm’s legal department.
A copy of the signature page and the trustee powers contained in the appropriate Article of the trust document will demonstrate that the trust is properly executed, and the trustee has the necessary powers to borrow money; buy and sell stocks, bonds, and options; trade on margin; and conduct other trust business. Sound doable?
If you’ve already had too much information – don’t worry. Just take it one step at a time. Or, have someone do it for you. Most opt to re-title assets themselves, but an attorney (or your super smart personal assistant) can always provide assistance if necessary.
TAX RETURNS. The regulations under the Internal Revenue Code were recently amended to provide that newly established grantor trusts of which the grantor is trustee or co-trustee need not file a tax return. Another yes! Because you are the owner of all property in the trust, you will continue to report all trust income as though it were your own. These new rules obviate the need to obtain a tax identification number for the trust as long as you remain the trustee or are a co-trustee. You may give your own social security number when opening accounts in the name of the trust.
JOINT TENANCY. You should not hold any assets as joint tenants without consulting a qualified estate planning attorney. Property titles such as joint tenancy will totally avoid the trust, may frustrate your intentions, and could have adverse income tax consequences.
INSURANCE COVERAGE AND LOANS. Some homeowner’s, liability, title and other insurance policies, as well as some kinds of home loans, may require that the insured parties provide certain notifications or obtain certain endorsements (often at little or no cost) upon the transfer of property into the name(s) of the parties as trustees, or into the name of a revocable living trust. You are advised to contact your insurance or loan agent to determine whether any such notifications or endorsements are required or advisable.
BUSINESS INTERESTS. Business interests such as S-Corps, C-Corps, and LLC’s can be placed in a trust. However, I recommend my estate planning clients consult with a business attorney (or trusted accountant) to ensure there is nothing that prevents the ownership from being transferred to a trust. Each business is also set up slightly differently, and it is the client’s responsibility to determine how to legally re-title their business interests. For sole proprietorship bank accounts, one can generally just list the trust as the “POD” beneficiary on the account. This can easily be done through the bank.
What about Cars and other Valuables?
Unless you have a car with an unusually high value, it is not normally necessary to transfer title to the trust. If you have other valuables, you can make specific gifts of these items within the trust documents. Generally, other household items will be listed in the schedule of trust assets along with the home(s), as “real property and all contents therein.” If there are items of extremely significant value that you would like distributed according to trust terms, those items may be re-titled in the name of the trust.
What about Debts?
Debts are not transferred to a trust. However, often your trust will contain provisions that allow the trustee to deal with debts. A trust may also forgive the debt of a beneficiary.
Setting up a trust and funding it can seem like an overwhelming task. That’s why so many of us avoid doing it. However, with the help of a knowledgeable trust and estate lawyer to guide you, the process can be made relatively simple.
If you’re contemplating doing a trust, I recommend just taking the first step – meet with an estate planning attorney. The rest will fall into place.