This is probably the most important part of getting a living trust. If you have signed your living trust document but haven't changed titles and beneficiary designations, you've simply wasted your money. You may have a great trust, but until you fund it, it doesn't control anything - because your living trust can only control the assets you put into it.
Remember, when you put assets in your living trust, you do not lose control of them. You can continue to buy and sell assets just as you did before. And anything you put into your living trust can always be taken out later.
In this section, we'll discuss who is responsible for funding your trust, how difficult this process is, and then explain the general procedures for changing titles and beneficiary designations for the most common types of assets people own. We suggest that you look for the ones you own and skip over the others. If you own something that is not included here, your attorney can tell you how to put it into your trust.
WHO WILL FUND
Usually, however, it is a combination of the attorney doing some and you doing some. Ideally, your attorney should review each asset with you, explain the procedure to you, and together you should decide who will be responsible for each asset. Many attorneys will put your home in your trust for you at no additional cost. Some also have legal assistants who can put other assets in your trust for you at a lower hourly rate than if the attorney does it.
Depending on how much the attorney charges, how comfortable you are with the process, how much time you have, and how interested you are in keeping your costs down, you may want to do many of them yourself.
Most attorneys have pre-written letters you can send to your bank, investment broker, insurance company, etc. that tell them how your assets should now be titled. At the least, your attorney should give you very specific instructions and the exact wording to use for titles and beneficiary designations. The wording will include the name(s) of the trustee(s), the name of your trust, and the date you sign the trust document. So it will be something like this: " John Doe and Mary Doe, Trustees of the Doe Family Trust, dated month/day/year."
IS THE FUNDING PROCESS?
Others will require written instructions from you, giving the institutions the exact wording to use on the titles and beneficiary designations (usually the pre-written letters from your attorney will be all you need). Some institutions have their own forms that you will need to complete (for example, life insurance companies have standard forms to change the beneficiary on policies).
Most changes can be handled through the mail and by telephone. Some will require your signature to be notarized or guaranteed (we'll explain who can do this for you).
Even though the process itself is not really difficult, it will take some time. How much time will depend on how many titles and beneficiary designations you have to change and how quickly the institutions respond. Most will be cooperative. However, you may encounter a few people who are still unfamiliar with living trusts. (Since living trusts have become so popular, this doesn't happen as often as it used to.) If you do have any difficulties, usually a quick call from your attorney will clear things up.
If you decide to do most of the funding yourself, we suggest that you make it a priority and keep going until you're finished. Start with your assets that have the largest values, then work down to the smaller ones. Remind yourself why you are doing this - and look forward to the peace of mind you'll have when your living trust is complete.
Now let's look at how titles and beneficiary designations are changed.
HOW TO CHANGE TITLES AND BENEFICIARY DESIGNATIONS
If You Live
In a Community Property State
As we explained in Part One, when one spouse dies, community property assets receive a full step-up in basis. This reduces the capital gains tax that would be due when the assets are eventually sold. With joint ownership, only the deceased's share would receive a step-up in basis - so you would have a bigger gain (profit) when the assets are sold, and would pay more in capital gains tax.
Community property status can be retained when the assets are put in your living trust. So, by retitling jointly owned assets as community property first, you will get the full step-up in basis when one spouse dies.
If You Live
in a Noncommunity Property State
If the asset is your personal residence, losing the full step-up will not be a problem unless the gain is more than $500,000. (If you are married, up to $500,000 of the gain on the sale of your personal residence is now exempt from capital gains tax. See page 167.) But it could be a problem for other assets like farmland, commercial real estate or stocks.
If this sounds like it could apply to your situation, check with your tax advisor before you change the title. (For more information, see Gallenstein v. United States, a 1992 Sixth Circuit Court of Appeals case. Other circuit courts have followed this ruling in similar cases.)
Your Home, Real
Estate, Land, Condominium, Etc.
The new deed will include how the property is titled now (before you put it into the trust), what the new title should be (to put it into your trust) and the legal description of the property. The deed for each property will be signed by you, witnessed, notarized, and recorded in the county where the property is located.
Again, your attorney will probably put your home in your living trust for you at no extra cost. This is usually a good idea since the home is the most valuable asset most people own, and the legal description and titles must be exact.
You may also be able to do part (or all) of it yourself. First find out what is involved - check with an attorney or escrow office in that state to find out the proper form to use, to verify the process, and to get the name and address of the recording office. In some states, your trust may have to be recorded - if so, a certificate of trust should be all that is needed. However, it may be more convenient (and wise) to have the local attorney or escrow office handle the transfer for you.
In the past, some people who wanted to put their homes into their living trusts were met with resistance. Many banks, savings and loans, and mortgage companies (called primary lenders) who write home mortgages simply did not understand living trusts. Many were also afraid the secondary lenders - institutions who buy home mortgages from these primary lenders, providing them with more money to loan out - would not buy mortgages if the borrower was a living trust instead of an individual.
But things have changed as living trusts have become so popular. Fannie Mae, Freddie Mac and Ginnie Mae (which buys FHA home mortgages) - the major secondary lenders - all now consider a revocable living trust to be an "eligible borrower" as long as normal guidelines are met (for example, the property must be owner-occupied, they want to make sure the trustee is authorized to borrow against the property, and they usually want the owner to be a trustee, which most people are anyway).
These recently published guidelines will make it much easier to transfer your home into your living trust, to refinance your home after it is in your living trust (without having to temporarily remove it from the trust), and even to purchase new real estate in the name of your living trust.
If you do run into resistance, it will probably be from a lender who has not informed its loan officers about living trusts or simply doesn't want to change the way it does business. If this happens to you, you can always take out the mortgage in your personal name and then transfer the property to your living trust after the closing - or you may want to find another lender.
Liability, and Title Insurance
Title insurance should also be changed. Check to make sure your title insurance company will still insure title when your living trust is the owner of the property. Most will. In fact, one of the largest title insurance companies routinely issues title insurance when the property is in a living trust. (And they do not require a separate title search.)
Even so, you may need to notify the tax assessor's office. In California, for example, a "Preliminary Change of Ownership Report" must be filed. This is a simple form (with check boxes) that the attorney usually completes at the same time the new deed is prepared.
However, a few states and counties are looking for creative ways to raise revenue and they may charge a transfer tax anyway. For example, Pennsylvania used to charge a transfer tax when real estate was transferred into a living trust and any beneficiary was someone other than a spouse, grandparent, parent, child, grandchild (and spouse) or sibling (and spouse). So if you named a friend or a charity as a beneficiary of your living trust (even as an Alternate beneficiary), you had to pay a transfer tax on real estate you put into your living trust. This tax was recently repealed, specifically for living trusts.
From Capital Gains Tax When Residence Sold
Thanks to The Taxpayer Relief Act of 1997, we have a new capital gains tax exemption that replaces these two previous ones. Now, under current tax law, if you sell your home and you are single, up to $250,000 of your gain (profit) will be exempt from capital gains tax - providing you have owned and made the house your principal residence for at least two of the past five years. (If you are married, up to $500,000 will be exempt.) You can use this exemption only once every two years. Having your home in a living trust will have no effect on you getting this new capital gains tax exemption.
Exemption From Creditors
If you don't have enough rental income (called "passive income") to offset your expenses (called "passive losses") in the year they are incurred, you can carry the excess losses ("net losses") forward and deduct them from rental income in subsequent tax years. If you have not been able to deduct all of your losses by the time you sell the property, you can write them off then.
As usual, there are exceptions:
1. If you earn your living mainly in the real estate business (for example, you are a contractor, builder or broker), you may not be affected by these "passive loss" rules.
2. If your Adjusted Gross Income (as defined on IRS Form 1040) is less than $150,000 and you actively participate in the management of the property (approve repairs and new tenants, write checks, make management decisions, etc.), you can deduct up to $25,000 ($12,500 if married filing separately) in net losses each year from your ordinary income (wages, tips, etc. as defined by the IRS on Form 1040). (If your AGI is more than $100,000, the $25,000 is gradually phased out so that, by the time the AGI is $150,000, the amount of passive net losses that can be deducted from ordinary income is reduced to "0.")
Transferring rental real estate to your living trust does not affect the way you handle these losses while you are living. However, if you are currently allowed to deduct up to $25,000 in net losses from your ordinary income, these losses may be handled differently after you (and your spouse) die. For a full explanation, see Part Eight.
Suspect the Property is Contaminated
Cards, Notes You Owe
Loans, And Notes Owed To You
If you have loaned someone money without documenting the loan, this would be a good time to put it in writing to prevent disputes over the terms and nature of the loan. Write up the terms of the loan and have it signed by the other party. An assignment can then be prepared to transfer the loan to the trust.
Saving, And Pay-on-Death Accounts
You may need to sign new account agreements. Some institutions will require a new account, with a new account number and new checks. If you are your own trustee, the information on your checks does not need to change - they can still be printed with just your name, address, and telephone number on them - and you continue to sign checks the same way you always have.
If you have named beneficiaries on any accounts, you'll want to change them to your living trust. For example, you may have established an account and named your spouse, child or grandchild as the beneficiary. These are called "Totten trusts." The account title probably includes the words "in trust for" (or "ITF"), "as trustee for" (or "ATF"), "payable-on-death" (or "POD"), or "transfer on death" (or "TOD").
Remember, by changing the beneficiary on these to your living trust, you prevent the possibility of the court taking control of the funds if your beneficiary is a minor or incapacitated when you die, or dies before (or at the same time as) you. The institution will probably have its own form to change the beneficiary.
To change the ownership or beneficiary of an account, the institution will probably ask to see a copy of your trust document. Remember, this is for your protection and, as we explained in Part Five, a certificate of trust should satisfy their requirements.
Some institutions will retitle the certificates immediately with no penalties. If yours requires you to wait until the certificate matures, you can go ahead and change the beneficiary and use an assignment to transfer your ownership interest to your trust. Then, when the certificate matures, you can change the title to your trust before you renew it.
Note: This process does not apply to IRAs that are invested in CDs. We discuss IRAs and your living trust later in this section.
When you retitle FDIC-insured accounts in the name of your living trust, the insurance coverage may change. In fact, your living trust accounts may qualify for much more FDIC insurance.
The general formula the FDIC uses when determining insurance for living trust accounts is: (the number of grantors living at the time the FDIC-insured institution fails) times (the number of qualifying beneficiaries living at the time the institution fails) times $100,000.
So, for example, if you and your spouse have one living trust together (you are Co-Grantors) and have named your three children and five grandchildren as the beneficiaries - and certain conditions, explained below, are met - your trust would be insured for up to $1,600,000 while everyone is living. (Two Grantors times eight qualifying beneficiaries times $100,000 = $1,600,000.) By contrast, if you and your spouse had a joint account instead, it would only be insured for up to $100,000.
For your living trust to be eligible for this additional coverage, it must meet certain conditions, which include:
The title of the account must indicate that a trust is involved. For example, " John Doe and Mary Doe, Trustees of the Doe Family Trust, dated month/day/year," "Doe Family Trust," and "Doe Family Revocable Trust," would all be acceptable titles.
A qualifying beneficiary can only be a spouse, child or grandchild of the grantor (a parent, sibling, niece, nephew or non-relative does not qualify) and must be listed by name in the "deposit account records" of the institution (for example, on the signature card).
There can be no conditions in the trust that would prevent a qualifying beneficiary from eventually receiving his/her share of the trust after you (and your spouse) die. For example, it is not okay to say that "my daughter will receive her inheritance only when she removes that ring from her nose" or "my son will receive his inheritance when he graduates from medical school" - because if these events never happen, the beneficiary would not receive his/her share.
Of course, to have an account at a credit union, you must be a member. And in order for your trust to qualify, all "parties" of your living trust - the grantor(s), trustees, and beneficiaries - must be eligible for membership. Since most living trusts only include family members (who are usually eligible to join anyway), this is not a problem for most people.
If you have named a corporate trustee as a successor trustee (which some people do), this may still be okay - because when a corporate trustee steps in, they will usually close the credit union account anyway and transfer it to an account they manage.
If your living trust does not qualify as a member, there are still some things you can do. You can name your living trust as the "pay on death" beneficiary on the account or add your living trust as a "joint owner with right of survivorship" (joint owners do not have to be members). Then, when you die, your credit union accounts will automatically be owned by your trust.
No special membership card or agreement is usually required when you open the new account for your living trust. The credit union will probably ask to see your trust document to make sure it qualifies for membership, what the trustee's powers are, who the successor trustees are, and when they are authorized to step in. (Although they may need to see who your beneficiaries are, they do not need to know how you will provide for them.)
Your trust, just like any other member, will be entitled to vote at annual meetings. However, since the trust is not a person, someone (usually the trustee) will need to be given the authority to vote for the trust .These rules apply to federal credit unions (more than half of the 14,000 credit unions are federally regulated), but even those that are state regulated will often follow these guidelines.
Note: If you think you may want to take out a loan at some point, you should probably keep an individual account with the minimum required balance. That's because your trust would only be allowed to borrow an amount equal to its own value.
Call them first to see if you should send a letter of instruction (remember, your attorney will probably include sample letters with your trust) or if they have their own form they can send you - or if they have their own procedures you will need to follow.
They may request that your signature be guaranteed. Your local banker or broker can probably do this for you (just call ahead and make sure). You will sign the form or your letter in your banker's or broker's presence, and he/she will affix a stamp that "guarantees" your signature.
They may also ask to see a copy of your trust document (again, the certificate of trust should be all they need).
• If You
If you are more comfortable keeping the actual certificates yourself, you will need to have new certificates issued in the name of your trust. (Never write or mark on an original stock or bond certificate.) Your broker or banker can have them reissued for you (they may charge a small fee).
You can also do this yourself. Your attorney can prepare a "stock power," a short document that assigns the securities to the trust, identifies what is being transferred (for example, 50 shares of General Electric stock), the certificate numbers, and the name(s) of the trustees. You'll sign the stock power and have your signature guaranteed (as above).
You'll then need to locate the stock transfer agent . This is the organization that is authorized to transfer title on stocks and bonds. For bonds, the transfer agent is usually the institution from which you receive payments on the bond. If you have stock certificates, don't rely on the name of the transfer agent on the certificate - it may be outdated. Call a brokerage house and ask them. Your attorney may also be able to find out the transfer agent for you.
Send the transfer agent - by certified mail - a letter, instructing them to issue new certificates in the name of your trust; a certificate of trust; and the certificates. Send the stock power separately, also by certified mail. (Do not send the stock power and the certificates together in the same envelope - if someone intercepts them, they would be able to negotiate them.) Make sure you keep copies. And check the new certificates as soon as you receive them.
If you have lost a certificate, contact the
transfer agent and request an "Affidavit of Lost
Certificate and Indemnity Agreement." Complete and sign
the affidavit, and follow the instructions to furnish
To have savings bonds re-issued in the name of your living trust, you'll need form PD-1851. If you have named a beneficiary on a savings bond, you can also change it to your trust using form PD-4000. (If you are changing a beneficiary on a Series E bond, the current beneficiary will need to sign the form; if this person is deceased, you will need to send along a death certificate.)
You can call the Federal Reserve Bank yourself to order forms or if you have questions (since forms change, make sure you verify which one(s) you need and the procedure). If you live in the mid-west or western U.S., you can call their customer service number in Kansas City: 1-800-333-2919. If you live in the eastern part of the country, call the customer service number in Pittsburgh: 1-800-245-2804. (By the way, the representative we spoke with was very knowledgeable and helpful - and said they get a lot of calls from people who want to re-issue their savings bonds in the names of their living trusts.)
Take Florida, for example. Currently, Florida has a $100 "new wheels tax" (in addition to other registration fees). This fee does not apply if you trade in your existing car for a new one. But it does apply if you buy an additional car or if you have never owned a car before. So, because your trust has not owned a car before, you will have to pay the "new wheels tax" when you transfer it into your trust. But you will only have to pay it once; you won't have to pay it again if you replace that car with another one.
However, a car is considered "exempt" property in Florida. So, if you plan to leave your car to your spouse or an heir, you don't need to transfer it to your trust and spend the $100. Your spouse or heir can transfer the car title after you die for less than $100. But if you plan to leave your car to someone else, then it is probably worth putting it into the trust and paying the $100 fee. (Don't you just love finding out what's going on in Florida?!)
You may want to call your state's license bureau to find out the process where you live. Depending on the costs involved and the value of the vehicle, you may want to wait until you purchase your next one and title it in the name of your trust.If the value of the vehicle is within the amount your state allows to transfer without probate, your attorney may even suggest that you leave your vehicle out of your trust. (As we explained in Part One, most states allow very small estates - some as low as $15,000 - to transfer without probate.) Also, if you are using a corporate trustee, they may not want to manage your car - unless, of course, it is of considerable value.
If you do title a vehicle in the name of your
trust, notify your insurance company so they can change
your policy to reflect the change of ownership and list
the trustee as an additional insured (if you are your
own trustee, it will show you as trustee instead of you
as an individual). They may request a copy of the new
registration and a letter of instruction from you. They
will probably make the change for you at no charge.
However, if the value of these articles is low enough that a probate would not be required in your state (as we explained above), your attorney may recommend leaving these out of your trust. They could also be intentionally left out if there was a desire to cut off creditor's claims in probate (as we explained in Part Two).
Naming your trust as the beneficiary gives you maximum control over the proceeds. It keeps the courts from getting involved if your loved ones are incapacitated, die before you (or at the same time as you), or are minor children. You can keep the proceeds in trust until you want your loved ones to receive the money. You can be sure the money is used to pay your final expenses. And by naming your trust instead of your spouse as the beneficiary, you can even keep control of the funds if your spouse should remarry.
Note: If you live in a community property state and the insurance was purchased with community property funds, your spouse is entitled to half of the proceeds and may need to sign a consent form if you want to name your living trust as beneficiary.
Naming your trust as the owner of your policies gives you maximum control over the policies and more flexibility. For example, if you name your spouse or someone else as the owner, you might worry that they will cancel the policy or change the beneficiary.
If you have a policy that has a cash value and you name your trust as the owner, your successor trustee would be able to borrow on the policy at your incapacity to help pay for your care. And if you suffer from a terminal illness, your successor could apply for a "Living Benefit" currently offered by many insurance companies. (Under this program, the "death benefit" is paid to you before you die - instead of to your beneficiary after you die - so the cash is available to help meet expenses while you are living.)
However, if your estate is large enough that it would have to pay estate taxes, you should probably consider having a Life Insurance trust (or other arrangement, like a Family Limited Partnership) to save estate taxes. We explain how they work in Part Nine.
Transferring subchapter S corporation stock to your living trust does not cause any change or any problem while you are living. After you die, however, the stock can only stay in your living trust for up to two years - after that, it would lose its "S" status and become a "C" corporation.
But this rarely happens - because two years is usually plenty of time to distribute the stock to the beneficiaries so the "S" status can be retained. If you don't want your beneficiaries to receive the stock outright, the IRS also allows it to be transferred to other trusts that meet its qualifications to retain the "S" status. The IRS creatively calls one of these "qualified subchapter S trusts" (QSST).
Your attorney should plan for the distribution of subchapter S stock when he/she prepares your living trust document.
The general partner may already have a form to assign your interest to your trust. If not, your attorney can prepare one. The assignment should identify your interest that is being transferred, how the interest should be titled, and that the trustee accepts any liabilities as well as benefits.
Send the assignment to the general partner with a letter instructing him/her to make the transfer. Since other documents may need to be prepared to complete the transfer, you may want to give the general partner a limited power of attorney to sign the other documents for you. (The general partner may charge a fee to do this.)
If you are using a corporate trustee with your trust, they may not be able to serve as a general partner. A special trustee may have to be appointed instead.
Patents, And Royalties
Oil And Gas
The process to put these interests into your trust will vary, depending on the state in which the property is located. You may want to have your attorney do these transfers for you. They can be tedious - the legal descriptions and depletion allowances must be exact, and you want to be sure everything is done properly.
Price & Farrington,
PLLC - Attorneys and
Counselors at Law