We are going to cover a general step by step guide that covers funding a Living Trust, what to do with your real property and bank accounts, how you should list your retirement account, beneficiary designations, and what to do with your other assets.
My first rule of funding a Trust, do not panic. Take a deep breath and just know if you take the process one step at a time, it will not be overwhelming.
I then like to start with this important reminder, reminding you that your trust can only manage trust assets. If you do not move the asset into the name of the trust, the trust cannot manage that asset.
What is funding a Living Trust?
Funding a Trust is the process of transferring your assets into your living trust. If you think of your living trust as an empty box or in this case a treasure chest. Your assets will not be protected until they’re in that treasure chest when it comes to a trust that just means titling the assets in the name of the living trust.
Put assets into the trust
That means in order to have your assets protected by the trust, you need to have them in the trust, so put your assets in the name of your trust.
It’s business as usual
When you move your assets into the name of the trust, it’s still business as usual. There is no change in property taxes, no changes in income taxes. If you have an asset in the name of the trust that generates income, the income it generates is still your taxable income.
The living trust avoids the death probate
That means your estate can avoid the probate court fees. Avoid the publication and bond fees. There’ll be no executor fees, no probate attorney fees. Also, the living trust is much faster than the court probate process, and the court probate process, it’s all in the public record. Whereas your living trust will remain confidential. The living trust avoids these probate concerns.
What about my pour-over-will?
If you were thinking, what about my pour-over-will? Doesn’t that move all of my assets into the trust when I die? Well, yes, the pour-over-will does accomplish that task. However, I want you to think of the pour-over-will as a safety net. It is there just in case you forget to move an asset into your trust, I do not want you to rely upon the pour-over-will. The pour-over-will goes through the courts. That means there would be a death probate. A judge would be required to move your assets into the trust for you. This will delay the process by about a year and the process will be much more expensive. That is why we recommend you fund your trust. Keep the pour-over-will only has a safety net just in case.
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Not included in trust
- Retirement accounts
There are some assets that we recommend that you do not move into your living trust. The first is retirement accounts. This includes IRAs, 401ks pensions, anything growing, tax-deferred. Moving an IRA into your trust while you are alive would be an immediate taxable event. It would be as if you cashed it out. Instead, we recommend that you use a beneficiary designation and I’ll devote more time to retirement accounts a bit later. Next, your automobiles, you can move your cars into the name of the trust, it’s just not required. It’s an extra trip to the DMV and who wants to do that. However, if you have a collectible car collection where vehicles increase in value over time or an individual vehicle with a value exceeding a hundred thousand dollars, then for that we recommend moving it into the name of the trust.
Annuities pass according to the beneficiary designation within that annuity; annuities are not moved into the trust.
- International assets
Your US-based living trust should only hold US-based assets. If you have assets in a foreign country, we recommend that you complete estate planning documents within that foreign country to cover those foreign assets.
Moving Real Property into the Trust
We are now going to discuss moving your assets into the living trust. The first big topic, real property. Your real estate should be in the trust and this is so important that I’m going to say it again. You must transfer your real estate property into the name of your Trust, that’s one of the most important assets that should be part of your to-do list for funding a Living Trust.
- Transfer existing real property
To transfer your property into the living trust, you may use a quick claim deed or a warranty deed. Prepare the deeds so that it transfers title from the way the property is currently out to the name of your trust. For our clients, this would be your formal trust name found in article one. Please note that the new deed should include the name of the then acting trustees. The legal property description must be entered exactly as it is on the current deed. Once the deed is signed, it must be recorded with the County where the property is located.
- Buying new real property and putting it on the Living Trust
When you acquire a new piece of property, simply take title to the property in the name of your living trust. This would be your formal trust name as indicated in article one of your trust. If you’re buying a property that will have a mortgage against it, you may find it easier to buy the property in your name. Then later move it into the trust once escrow closes.
Real Property- Insurance
When you change title of real property, please contact your insurance carrier regarding any insurance on the property including but not limited to homeowner, fire, earthquake, and flood insurance to advise of the change of ownership. Otherwise, it is possible that in the event of a loss, the carrier may deny coverage claiming that the new titled owner is not the insured.
Real Property – Title Insurance
You should also contact your title insurance company and advise them of the change of ownership.
What are some common problems we see with real property in the name of the Trust.
If you refinance a property and the bank requires you take the property out of your trust, make sure that you prepare a new deed to move the property back into your trust upon the completion of the refinance process. If you must do this strategy, it’s recommended to prepare two deeds. The first takes the property out of your trust and the second puts the property back into the trust. You would sign both deeds at the same time, record only the first deed, and move forward with refinance. Upon completing the refinance record the second deed, moving the property back into the trust, the benefit of this strategy is that if anything should happen to you during the refinance process, the second deed is already pre-signed and it can be recorded at that time and protect against the property going through the death probate process. As time goes on, banks are becoming more comfortable with the refinancing a property held in a living trust. However, the bank may require a complete copy of your trust or if you complete many additional forms.
Your timeshare should be the name of the trust. Often the first step is to contact the timeshare company and ask them what they require to move your interest into your trust.
- Out of state property.
Your out of state property should be in the trust. If the out of state property is not currently in the trust, you may want to contact an Attorney in the state where the property is located to arrange for a deed to be prepared to move the property into the trust.
- Small properties.
Even a small undeveloped lot should still be titled in your trust. Otherwise, upon your death, the property may need to go through the death probate process.
Transfer Bank Accounts into a Living Trust
What about bank accounts? Should they also be part of funding the Living Trust? We recommend that you contact your financial institutions to determine what they required to move your accounts into your trust. You may want to make an appointment with an accounts representative at that time. Often banks require a certificate of trust or a brief summary of the relevant terms of your trust.
Bank Accounts – Certificate of Trust
Please take the certificate of trust with you to your banks. If you take your original certificate of trust with you to the bank, please remember to take it home with you when you complete the process with the bank, I will caution you that banks most likely will require that you complete the bank-specific forms. We still recommend taking the certificate of trust with you as they may only need to see the certificate of trust. Even if the bank does require that you complete the banks forms. Most of the answers to the banks forms can be located on our certificate of trust.
There are some circumstances when you may not want to move your bank accounts into the trust.
- Social security and when the heirs do not have funds of their own, we will start with social security. Social security must be paid directly to the beneficiary. The social security administration has taken the position that it cannot provide direct deposit to an account held in the name of a trust. If you receive social security direct deposit, you may want to leave that account that receives social security outside of your trust, but to prevent that account from going through the death probate; we recommend that you consider adding a TOD or POD beneficiary designation on the account.
- Transfer on death, TOD, or payable on death, POD beneficiary designations. The terms TOD and POD are practically interchangeable, but some financial institutions only refer to it by one or the other. So I provide you with both, these beneficiary designations move the assets at your death. This prevents a court from getting involved as the assets or in this example, the bank account would automatically pass to the TOD, POD beneficiary upon your death. You may list an individual beneficiary or multiple beneficiaries or you may list your trust as the beneficiary, an advantage of listing the trust is that the trust cannot die, whereas the named beneficiary could die. You would set up the TOD, POD beneficiary designations with your financial institutions. The named beneficiary would need to provide a death certificate to the financial institution in order to receive under the TOD, POD provisions. As it takes approximately two weeks to receive a death certificate, that means the beneficiary would need to wait at least two weeks in order to get access to the account.
Bank accounts – Joint accounts with trusted loved ones
What if your beneficiary simply could not wait two weeks to get access to the account? Perhaps the beneficiary would not be able to pay household bills or funeral expenses without access to the account. In that situation, you may want to leave a small pool of cash outside of the trust and held jointly with a trusted loved one, we recommend limiting such pool of cash to approximately one month worth of expenses. The reason we recommend limiting the amount in the account is that the account could be subject to your loved ones, creditors, or even included in the loved ones, divorce proceedings or the loved one could simply withdraw the entire balance of the account. While we hope that none of these situations would ever happen, we recommend that you limit your exposed risk by limiting how much is in the account. That way if something did happen, yes it would be unfortunate to lose a month worth of expenses, but it would be far superior than losing your entire life savings.
We have now reached the section on retirement accounts. As a reminder, retirement accounts are not moved into the trust during your lifetime as doing so would be an immediate taxable event. If you are a client of our office, please consult your client disclosures and consent document to see your specific recommendations.
Retirement Accounts – General – If married
General information on retirement accounts, what if the follow-up may not be applicable for your specific situation. This is general information. If you are married, we recommend that you list your spouse as the primary beneficiary of your retirement accounts. A spouse who inherits a retirement account may roll over the account into a new retirement account in that spouse’s name. For IRS purposes, it would be as if the spouse personally put aside the money in that retirement account and the required minimum distributions would be calculated accordingly.
For non-spouse beneficiaries
The inherited retirement account will stretch for the actuarial life expectancy of the listed beneficiary. A person that inherits their retirement account, would be able to stretch that account for their actuarial life expectancy. A young person might have a 50 plus year life expectancy by taking out a certain percentage set by the IRS. Each year this allows the vast majority of the account to continue to grow tax-deferred for that life expectancy. However, the required minimum distributions for all beneficiaries maybe based upon the age of the eldest designated beneficiary. That is why we recommend grouping similar age people together as retirement account beneficiaries. You would not want to list your 75-year-old parent and your 25-year-old child, both as beneficiaries of your retirement accounts as the life stretch for both would be based on the much shorter, 75-year-olds life expectancy.
There are risks of listing named beneficiaries. Let’s say when you first opened your retirement account, you had two children and you provided that each would receive 50% of your retirement account upon your death, but now you have three children. That third child would not inherit from that retirement account unless you updated the beneficiary designation to include that third child. And another risk is that if a minor inherited a retirement account, upon attaining the age of 18 they would get complete access to that account and could cash it out. Yes, there would be tax consequences, but the beneficiary would have full access. And in a single weekend could spend the entire retirement account everything that you would put aside during your entire life. Also inherited retirement accounts are not protected from your beneficiary’s creditors, meaning divorce or lawsuits could take those inherited retirement accounts from your beneficiary. Finally, there are no trust protections if you leave an account directly to a named beneficiary.
What if you list the trust as the beneficiary of your retirement accounts? One advantage would be that all of the trust protections of the trust for your beneficiaries would apply. This can include asset protection for your beneficiaries or having a trustee manage the assets for the benefit of the beneficiary. Another advantage is if you want to update your beneficiaries in the future, you only need to update the trust. You do not also have to update your retirement account beneficiary. However, the IRS has imposed a five-year limit on retirement accounts left to trust. This means rather than growing tax-deferred for the life of the beneficiary. Now everything in that account has to leave that tax-deferred status within five years of your death.
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Family retirement preservation trust [FRPT]
What if there was a way to have the inherited retirement accounts received the protections of the trust, but allow the retirement accounts to stretch for the actual life expectancy of the beneficiary. There is, we call it the family retirement preservation trust. The family retirement preservation trust is language that can be added to your existing trust to provide extra protection for inherited retirement accounts.
- Safe-deposit box
Your safe deposit box with the bank should be in the name of your living trust. If anything happened to you, your successor trustees could get access to the box and the items within it. If you do not title the safe deposit box in the name of your trust, but instead at a trusted loved one’s name to the box, please do not store valuables within it as the contents of the safe deposit box could be subject to your loved ones creditors. Moving your safe deposit box into your trust is similar to moving a bank account into the trust.
- Stocks, bonds, mutual funds, bearer bonds
Often is easier to move these assets into the trust by opening a brokerage account and having the broker handle the transactions for you. If a broker is not used, you’ll need to send a letter for the particular stock to the transfer agent or to the corporate office of the company. Bearer bonds generally do not have names inscribed on them to indicate ownership, to place them in the living trust you should use a written assignment.
- Brokerage accounts
Opening a brokerage account in a trust or moving an existing account into a trust will often involve completing a form that the broker will provide. The form will be similar to the certificate of trust mentioned previously, whereas a checking account certificate of trust may be one to three pages long. A brokerage account form is often closer to 20 pages and while this may seem intimidating, if you take it one page at a time, you will get through it. Most of the form is dedicated to the power section determining if your trustee will have the authority to make specific investment decisions.
- US savings bonds
The US Treasury no longer offers paper bonds. Instead, the US Treasury only offers electronic bonds through treasury direct. To move your US savings bonds into the trust, the first step is to create an account in the name of your trust with Treasury Direct. www.treasurydirect.gov. Complete treasury form PDF 1851 and list every bond that you wish to move into your trust. The form needs to be signature guaranteed. This is only available at financial institutions. Please contact your bank to see if they provide signature guaranteed services.
- Certificates of deposit CDs
With CDs, you may want to wait until the CD matures before transferring it into your trust. Otherwise, interest penalties for early withdrawal may apply. Please contact your specific bank to determine how they handle moving existing CDs into the trust. If the bank would charge penalties, you may consider using TOD, POD beneficiary designations until the CD matures. Once matured, you may buy new CDs in the name of your trust.
- Furniture and personal property
If you had your trust prepared by our office, we have included a general assignment of property that moved your miscellaneous furniture, furnishings, appliances, family heirlooms, collectibles, and jewelry into your living trust.
- Trust deed or mortgage
The mortgage on your house does not get moved into your trust. What I’m talking about here is when you are the lender, a trust deed or mortgage is a document that gives a lender a security interest in someone else’s real estate. You as a lender are entitled to foreclose on the property in the event payments on the loan are in default. The trust deed or mortgage can easily be assigned to your living trust by preparing an assignment of deed of trust or assignment of mortgage, whichever applies. This assignment should be notarized and recorded in the same manner as a transfer of real property.
- Closely held partnerships, corporate and Limited Liability Company, business interests.
Personally contact the general partners or managers for guidance on the business’s specific requirements to transfer an ownership interest into a trust. You may want to review the business’s operating agreement or bylaws for additional guidance. The approval of the general partners or managers may be needed. There may need to be a formal vote of the board of directors. The approval of all or a majority of the participants may be required. No approval of any other participants may be needed. Once you satisfy the business’s specific procedures, a simple transfer document should accomplish the task of transferring the interest to your trust.
- Life insurance
We recommend that you change the ownership and beneficiary of your life insurance to be your living trust.
That concludes the instructions on funding a Living Trust. We do hope that you found it informative. At this time we have a request of you. Please do not keep our Estate Planning resources a secret. Tell your family, friends, business associates, neighbors, and people at your place of worship about us. Do you want us to speak to any group you belong to? Let us know.