Estate Planning Basics: Financing Your Trust
The property you own can be transferred to your chosen heirs or beneficiaries after your death in one of several ways. If the particular asset is owned by you and someone else, such as a residence jointly owned by you and your surviving spouse (JWROS), the property will automatically pass to your spouse upon your death. Assets can also pass through a beneficiary designation, such as in a transfer on death or a pay-on-death account with your bank. A third possibility is that the property goes through the probate process, either according to your will or (in the absence of a will) according to intestate law.
A fourth means of transferring ownership of your assets is through a trust agreement, such as a revocable living trust. This method offers a number of advantages as an electing component of an estate plan. A well-designed trust agreement can be the vehicle by which your assets are transferred after your death. In addition, the trust may include detailed instructions on how the designated successor trustee should manage your assets in the event you become unable to manage them yourself. However, to take full advantage of the benefits of a trust, your assets must first be placed in the trust.
When your estate planning attorney refers to financing your trust, he is talking about placing your assets in the trust. Let’s look at some basic principles related to this important, but often overlooked, aspect of creating a trust as the basis of your estate plan.
What is so important about escrow financing?
A well-designed trust agreement is nothing more than an empty shell and of little or no value to you (the settlor) or your intended beneficiaries, unless you actually have your assets. If you die before your assets are placed in trust, those assets will likely be subject to the probate process (unless JWROS are held or passed in accordance with beneficiary designations). it will immediately be subject to the management and control of its chosen successor trustee.
Do I have to transfer all my assets to my trust?
Not necessarily. It is true that many of your assets must be transferred as soon as the trust is created, including assets such as: your personal residence; stocks, bonds and mutual funds that you own in your own name; checking/savings accounts and certificates of deposit; personal property and collectibles; business, such as shares in corporations you own, partnership interests, and membership interests in limited liability companies; and your intellectual property rights, such as patents, trademarks and copyrights. An important aspect of establishing your trust should include a thorough review of all of your assets with your estate planning attorney to determine which of those assets should be transferred to the trust.
Why not transfer all my assets to the trust?
There are some categories of assets that should not be owned by your trust. For example, any individual retirement accounts, pension plans, and 401k accounts should not be owned by your trust. A transfer from such retirement plans to your trust may well be treated by the IRS as a taxable distribution of the entire account, thereby creating an unwanted tax liability for you. In general, you would do well to remember that estate planning in regards to retirement plans is a complex topic and one that should be discussed with your attorney.
If you own a second home, either as a rental property or as a vacation home, you should also carefully consider whether it is advisable to transfer that property to the trust. Is this property subject to a mortgage that includes a “pay on transfer” provision? If so, your lender may treat the transfer of the property to your trust as triggering your obligation to repay the loan in full. Again, this is an area to discuss with your estate planner.
How do I transfer those assets that must be deposited in my trust?
The answer here is: it depends on the particular asset being transferred. You would transfer your residence to the trust by recording a quitclaim deed with the real estate records in the county in which the property is located. So, for example, if you are the sole owner of real property, you (as the grantor) would transfer the property to “yourself as trustee of the [name] Trustee”, as transferee. You should be careful not to simply title the property in the name of the trust. A transfer to the “John Doe Trustee” may not be recognized as legally effective; instead, the transfer should be to “John Doe, Trustee , of the John Doe Trust pursuant to agreement dated January 1, 2001.”
Your checking accounts, savings accounts, and certificates of deposit can be transferred to your trust by asking your bank to provide you with the appropriate signature cards, which will then need to be signed by the current trustees of your newly created trust.
Will I need new checks issued to the trust?
You most likely won’t have to do that. Changing the title of your checking account to the name of the trust should have no effect on the account holder’s name printed on your checks.
How do I transfer stocks and mutual funds that I own?
Assuming your stocks and mutual funds are held by your broker, you’ll need to instruct your broker to retitle your personal accounts to your trust name. This may involve completing a new brokerage account application. Your broker may require you to provide evidence of the existence of the trust, in which case you will need your attorney to draw up a certificate of trust for you to sign as the settlor.
If you have original stock certificates for a publicly traded company, you may need to open an investment or brokerage account in your trust’s name and then deposit the original stock certificates with the brokerage or you may need to contact the broker designated by the corporation that issued the shares and follow their instructions to change the title of the shares to your trust.
What if I have interests in a partnership or limited liability company (LLC)?
You will need to transfer your partnership or LLC membership interest to your trust through a written transfer of interest signed by you and acknowledged by the managing partner or managing member of the LLC. You should first review the LLC/LLC operating agreement to ensure that the agreement does not preclude such a transfer.
Do I need to title my car and RV in the name of the trust?
Although you can transfer title to your personal vehicle(s) and/or RV(s) to your trust, it may be preferable not to. If you are in a car accident, the fact that your vehicle is titled in your trust’s name could lead the injured party to believe that you have a lot of money, which could encourage a lawsuit. You’d be better off segregating a high-risk asset (such as your vehicle) from your lower-risk assets.
To summarize, using a revocable living trust as the basis of your estate plan will allow your assets to be distributed after your death without having to go through the probate process. Having a trust will also allow your chosen successor trustee to manage your property while you are incapacitated, thus avoiding the need for an expensive court-administered guardianship or conservatorship proceeding. However, to fully reap the benefits of a trust, you must properly fund your trust. We recommend that you use the above guidelines as the basis for a comprehensive review of your assets and discussion with your estate planning attorney.
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