Wednesday, March 19, 2008

Funding Your Living Trust

Many people are currently using the Revocable Grantor Trust, or Living Trust to complete their estate planning. While the living trust is a wonderful estate planning tool, signing the document is not enough. To realize the probate avoidance and other benefits of the living trust, the trust must be Funded.

Funding your trust means transferring your assets into your trust, so that they are owned by the trust prior to the death of the grantor (the person who is setting up the trust). Only assets owned by the trust will be distributed under its terms at the death of the grantor. Why? A trust is a legal, non-human entity which can own property. It has many similarities to a corporation, except that it is not intended to conduct a commercial business. When the CEO of a corporation dies, the corporation does not necessarily die; the establishment documents of the corporation usually provide for the replacement of the CEO, so that the business can continue to operate. A trust provides for the same type of continuity; when the trust is established, the grantors name their successor trustees, who will conduct the business of the trust if the primary trustees can no longer do so. The benefit of this continuity is the avoidance of the Probate process in Virginia. [Without a trust, when a person dies, any assets owned in that person’s sole name need to be transferred to the person who will inherit them under court supervision. This court supervision is called Probate. Request prior articles for more information].

In this article, we will be looking at the funding process as the Smiths, who just signed their trust, fund their trust. Mr. and Mrs. Smith are married to each other and have executed a joint living trust which names the two of them as primary co-trustees, and their children, Ann and Bob, as co-successor trustees. The Smiths are in a first marriage, and own all their assets jointly (please note that some of the funding strategies discussed in this article would be different if the Smiths were liable for estate tax). The name of their trust is the Smith Family Trust, dated 1/15/08. Mr. and Mrs. Smith own a home, two checking accounts, one savings account, one mutual fund account, one stock account, two individual retirement accounts, one life insurance policy on Mrs. Smith’s life, one life insurance policy on Mrs. Smiths life and two cars. They have asked me to help them to fund these assets to their trust.

To organize the assets owned by the Smiths, it is helpful to make a list of each asset, and arrange the assets in order of descending value. If the Smiths begin their funding with the most valuable assets and work their way down to the least valuable assets and they should die prior to having all assets funded, at least the more valuable ones would be funded, minimizing probate costs.

Generally the home is the most valuable asset owned by the grantors, and, as such, would be the first to be funded. A new deed is prepared that states that the home is now owned by Carl Smith and Debra Smith, trustees, or successor trustees, of the Smith Family Trust dated 1/15/08. Although this is a mouthful, this is a “magic phrase” that states that the acting trustee owns the home. During their lives, this is Mr. or Mrs. Smith; after death, it is Ann and Bob Smith. Because the successor trustees automatically own the home, no probate is required. We will use this ownership phrase to retitle each asset the Smiths own.

The first step in the funding process is to contact the account holder (such as a bank, credit union, stock broker or insurance company) of each account and ask them to send the form the account holder uses to transfer an asset to a Revocable Grantor Trust. While no account holder will allow transfer of an asset to a trust that is not yet signed, they will send the asset transfer forms prior to the signing, which can save time in completing the funding.

Use of a table to list the assets and track the funding process can be helpful for most clients. One sample entry from the table I use looks like this:

Asset Transfers to Trust


Request Form

Receive Form

Return Completed Form

Transfer Complete

1st Fidelity Savings




This table serves a dual purpose: being able to track the funding progress for all assets at once, and, when finished, the table provides a list of all assets owned by the trust (an updated copy kept with the trust makes sure that the successor trustees know where to find the trust’s assets).

The Smiths have made a list of their assets, and have received the transfer forms from the account holders. They have questions about transfers of their other assets:

Can checking and savings accounts be transferred to the trust? The answer is yes they can, and also, that they should be transferred to the trust. At the death of the second grantor, having the accounts in the trust makes it far easier for the successor trustees to be able to access the funds in the accounts; remember, the successor trustees automatically own assets owned by the trust at the time they become successor trustees. Accounts that have to be probated would not allow immediate access to the funds. Completion of the bank’s asset transfer form should be all that is required to effect transfer; the information printed on the checks is not affected (in other words, your checks do not have to name the trust); only the ownership documents need to be changed.

How are stock and mutual funds transferred to the trust? In the area of stock type assets, a distinction needs to be made between ownership of a stock/ mutual fund account, and outright ownership of the actual share of stock. With an account (i.e., Merrill Lynch, Charles Schwaub, Prudential, Fidelity, Vanguard, etc.), one change to the ownership documents of the accounts changes title for all the stock or mutual funds in the account. If you actually hold your own stock certificates, they generally need to be returned to the issuing corporation with a medallion seal (or signature guarantee, usually available at larger banks), and the certificates are reissued in the name of the trust.

How do we transfer IRA’s to the trust? This is a very important question, because any tax deferred assets are handled differently that other assets. Tax deferred accounts are transferred to the trust by a change of beneficiary designation, NOT by a change of ownership. Tax deferred assets (IRA’s, Thrift Savings, Keoughs, 401k’s) are accounts that are structured so that income tax is paid at the time the funds are distributed from the account, NOT when the funds are contributed. A change of ownership is a taxable event, so we do not use a change of ownership to handle these accounts. Generally, these accounts have a beneficiary designation, which names the person(s) who inherits at the account holder’s death, and, if transfer to the trust is desired, the beneficiary designation can be changed to name the trust. Transfer of tax deferred assets to the second generation heirs can be accomplished in different ways. If the Smiths have grown children whom they want to inherit their IRA’s, they can simply name the spouse as the first beneficiary, and the children, jointly, as the second (or contingent) beneficiaries. If the spouse survives, he or she will inherit, if not, then the children will inherit. Current rules allow the heirs to roll the IRA fund over into IRA’s for themselves, reducing the overall income tax burden (Caveat: using beneficiary designations to avoid probate has many large pitfalls- please research this option very carefully before using it). If the Smiths had young children, a disabled child, or young grandchildren, they probably would name the trust (rather than the children) as the contingent beneficiary, so the children would inherit through the distribution scheme set up in the trust, which may have age-related or other restrictions on the way children will inherit. The decision as to whether to transfer tax-deferred assets into the trust, and how to accomplish it depends on many factors; you may want to consult a financial planner, accountant or estate planner for help determining how to best accomplish your goals.

What about life insurance? Life insurance is not generally tax deferred, but, with a revocable grantor trust, transfer is usually accomplished by a change of beneficiary also (Any life insurance policy with tax-deferred benefits should be treated as a tax-deferred asset to avoid income tax complications). In a situation like that of the Smiths (a couple with no estate tax liability), the general procedure is to name the spouse as the first beneficiary and the trust as the second beneficiary.

How do we retitle cars to the trust? When looking at the assets a family owns and wants to transfer to the trust, cars are generally very low on the priority list, for two reasons: cars are disposable assets, and the cost and inconvenience of retitling can be prohibitive. Most people do not currently own the car they will own at the time of their death. Since most cars depreciate quickly, even a car you bought two years ago may be worth only a small portion of the purchase price. The Department of Motor Vehicles charges a fee (approximately $35 at last look) to create a new title, and the fee and the waiting time may mean that retitling the car is just not worth it. The DMV has a simplified probate procedure if a car is the only item to be probated, so the risk you run by leaving a car out of the trust may be minimal. When you buy a new car it can be titled directly into the trust at the time of purchase.

Do we have to retitle personal property into the trust? Personal property (household goods, jewelry, electronics, furniture, etc.) is generally transferred to the trust by means of a document (signed at the time the trust is signed) called Transfer Document or something similar. This document transfers non-titled property to the trust. This approach works well, but if you have any personal property that is very valuable, you might want to sign an additional document (called an assignment) that specifically states that the valuable piece of personal property is thereby transferred to the trust.

Tip: at the time that you sign your trust, find the place in the trust where the trust name is stated (its usually on the first page). Using a small card (or a business card of the attorney who drafted the trust), write the name of the trust on the card. Keep the card in your wallet, so that the name of the trust is available when you want to buy a car, open a bank account or rollover a CD. Proactively funding the trust is much easier and more certain than funding after the asset is titled.

1 comment:

Unknown said...

Hi! nice post. Well what can I say is that these is an interesting and very informative topic. Thanks for sharing.Cheers!

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