Understanding
Funding Your Living Trust
Why and How to Transfer Your Assets To Your Revocable Living Trust
1.
Introduction
2. What is “funding” my trust?
3. Who controls the assets in my trust?
4. Why is funding my trust so important?
5. What happens if I forget to transfer an asset?
6. Who is responsible for funding my trust?
7. Won’t my attorney do this?
8. How difficult is the funding process?
9. Which assets should I put in my trust?
10. Will putting real estate in my trust cause any inconveniences?
11. What about out-of-state property?
12. What about contaminated property?
13. What about community property status?
14. Should I put my life insurance in my trust?
15. Should my trust own my car?
16. What about my IRA and other tax-deferred plans?
17. Are there any assets I should not put in my trust?
18. What about property that doesn’t have a title?
19. What if I buy new assets after I fund my trust?
20. Funding Your Living Trust (Summary)
1. Introduction
These days many people choose a revocable living trust instead of relying
on a will or joint ownership in their estate plan. They like the cost
and time savings, plus the added control over assets that a living trust
can provide.
For
example, when properly prepared, a living trust will avoid the public,
costly, and time-consuming court processes at death (probate) and incapacity
(conservatorship or guardianship). It can let you provide for your spouse
without disinheriting your children, which can be important in second
marriages. It can save estate taxes. And it can protect inheritances for
children and grandchildren from the courts, creditors, spouses, and irresponsible
spending.
Still,
many people make a major mistake that can render their trusts useless:
they don’t fund their trusts.
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2. What is “funding”
my trust?
Funding your trust is the process of transferring your assets from you
to your trust. To do this, you physically change the titles of your assets
from your individual name (or joint names, if married) to the trustee
of your trust. You might also decide to change most beneficiary designations
to your trustee.
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3. Who controls the assets in my trust?
The trustee you name for your living trust controls the assets in your
trust. Most likely, you have named yourself as trustee so you will still
have complete control. Remember, one of the features of a revocable living
trust is that you can continue to buy and sell assets just as you do now.
You can also remove assets from your living trust should you decide to
do so.
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4. Why is funding my trust so important?
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 (transfer your assets
to it), it doesn’t control anything...because your living trust
can only control the assets you put into it. And if the goal of your living
trust is to avoid probate at death and court intervention at incapacity,
then you must fund it now, while you are able to do so.
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5. What happens if I
forget to transfer an asset?
Your attorney will prepare a “pour over will” that acts as
a safety net. When you die, the will “catches” the forgotten
asset and sends it into your trust. The asset will probably have to go
through probate first, but then it can be distributed according to the
instructions in your trust.
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6. Who is responsible
for funding my trust?
You are ultimately responsible for making sure all of your appropriate
assets are transferred to your trust.
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7. Won’t my attorney
do this?
Typically, you will transfer some assets and your attorney will do some.
Most attorneys will transfer your home for you, and will provide instructions
for the rest of your assets. Often they will include sample letters or
blank forms for you to use. Ideally, your attorney should review each
asset with you, explain the procedure, and help you decide who will be
responsible for transferring each asset. Once you understand the process,
you will most likely decide to transfer many of your assets yourself and
save on legal fees.
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8. How difficult is the
funding process?
It’s not difficult, but it will take some time. Because living trusts
are now so widely used, you should meet with little or no resistance when
transferring your assets. For some assets, a short assignment document
will be used. Others will require written instructions from you. Most
can be handled by mail or telephone.
Some
institutions will want to see proof that your trust exists. To satisfy
them, your attorney will prepare what is often called a “certificate
of trust.” This is a shortened version of your trust that verifies
your trust’s existence, explains the powers given to the trustee,
and identifies the successor trustees, but it does not reveal any information
about your assets, your beneficiaries and their inheritances.
Even
though the process is not difficult, it can be easy to get sidetracked
or procrastinate. To prevent this from happening, make funding your living
trust a priority and keep going until you’re finished. Make a list
of your assets, their values and locations; then start with your most
valuable ones and work your way down. Remind yourself why you are doing
this, and look forward to the peace of mind you’ll have when the
funding of your trust is complete.
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9. Which assets should
I put in my trust?
The general rule is that all of your assets should be in your trust. However,
as we’ll discuss later, there are a few you may not want in, or
that cannot be put into, your living trust.
Generally,
assets you do want in your trust include your home and other real estate,
bank and saving accounts, investments, business interests and notes payable
to you. You will also want to change most beneficiary designations to
your trust so that those assets will flow into your trust and be included
in your overall estate plan.
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10. Will putting real
estate in my trust cause any inconveniences?
In most cases, you will notice very little difference. You may even find
it easy to transfer your home and other real estate to your living trust,
and to purchase new real estate in the name of your trust. Refinancing
may not be as easy. Some lending institutions require you to conduct the
business in your personal name and then transfer the property to your
trust. While this can be annoying, it is a minor inconvenience easily
satisfied.
Because
your living trust is revocable, transferring real estate to your trust
should not disturb your current mortgage in any way. Even if the mortgage
contains a “due on sale or transfer” clause, retitling the
property in the name of your trust should not activate the clause. There
should be no effect on your property taxes because the transfer does not
cause your property to be reappraised. Also, having your home in your
trust will have no effect on your being able to use the capital gains
tax exemption when you sell it.
Make
sure your homeowners, liability and title insurance are all changed to
reflect your trustee as the new owner.
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11. What about out-of-state
property?
If you own property in another state, transferring it to your living trust
will prevent a conservatorship and/or probate in that state. Your attorney
can contact a title company or an attorney in that state to handle the
transfer for you.
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12. What about contaminated
property?
You can put contaminated property in your living trust, but the trustee
can be held personally responsible for any clean up. If you are your own
trustee, this won’t affect you because you are already responsible.
But if clean up is not complete by the time your successor trustee steps
in, your successor (and, ultimately, your beneficiaries) can also be liable.
If you suspect this may apply to you, tell your attorney before you transfer
the property to your trust.
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13. What about community
property status?
Community property status can be continued inside your living trust. Also,
if you live in a community property state, your attorney may suggest that
jointly-owned assets, especially real estate, be retitled as community
property before they are put in your living trust. This will reduce capital
gains tax if the asset is sold after one spouse dies.
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14. Should I put my
life insurance in my trust?
That depends on the size of your estate. If you are single and your net
estate (assets minus debts), including the death benefits from your life
insurance, is less than $1 million, or if you are married and your net
estate is less than $2 million, your estate will not have to pay estate
taxes when you die. In this case, your living trust should be both the
owner and beneficiary of your life insurance. This will give your trustee
maximum control over the policies and proceeds.
If
your estate is larger than this and you die before 2004, your estate will
have to pay estate taxes. In this case, it would be better to set up a
separate irrevocable life insurance trust and have it own your insurance
policies. Because you would no longer own the insurance, it would not
be included in your taxable estate. Reducing the size of your estate will
reduce your estate taxes, and that will leave more for your loved ones.
There
are some restrictions on transferring existing policies to an irrevocable
life insurance trust. If you die within three years of the date of the
transfer, it will be considered invalid by the IRS and the insurance will
be included in your taxable estate. There may also be a gift tax. These
restrictions do not apply to new policies purchased by the trustee of
this trust. Be sure to discuss this with your attorney.
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15. Should my trust
own my car?
Unless the car is valuable and substantially increases your estate, you
will probably not want it in your trust. The reason is this: if you are
at fault in an auto accident and the injured party sees that your car
is owned by a trust, they may think “deep pocket” and be more
likely to sue you.
Every
state allows a nominal amount of assets to transfer without probate. If
the value of your car falls within this amount, you are probably okay.
Some states let you name a beneficiary for your car, which avoids probate
and works well. Your attorney will know the procedures and laws in your
state and will be able to advise you.
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16. What about my IRA
and other tax-deferred plans?
You cannot change the ownership of these to your living trust. You can
name your living trust as the beneficiary, but be sure to consider all
your options. These include your spouse, if you are married; your children,
grandchildren or other individuals; a trust; a charity; or a combination.
Whom
you name as beneficiary of these plans will have a significant impact
on the amount of tax-deferred growth this money can continue to earn after
you die.
If
you are married, your spouse is probably your best option because if you
die first 1) the money would be readily available to your spouse and 2)
it gives you the spousal rollover option. (After you die, your spouse
can “roll over” your tax-deferred account into his/her own
IRA and name a new beneficiary, preferably someone much younger, as your
children and/or grandchildren would be.)
Of
course, any time you name an individual as beneficiary, you lose control.
After you die, the beneficiary can do whatever he or she wants with this
money, including cashing out the account and destroying your carefully
made plans for long-term, tax-deferred growth. The money could also be
available to creditors, spouses and ex-spouses. And there is the risk
of court interference at incapacity.
Naming
a trust as beneficiary will give you maximum control over the money because
the distributions will be paid not to an individual, but into a trust
that contains your written instructions stating who will receive this
money and when. After you die, the distributions will be based on the
life expectancy of the oldest beneficiary of the trust. The trust must
also meet certain legal requirements, which most living trusts now do.
The
rules for these plans have recently been made simpler, but they can still
be confusing, and it is easy to make a mistake that will prove costly
to loved ones. Because there is often a lot of money at risk, be sure
to get expert advice.
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17. Are there any assets I should not put in my trust?
If you live in an noncommunity property state and have owned an asset
jointly with your spouse since before 1976, transferring the asset to
your living trust could cause your surviving spouse to pay more in capital
gains tax if he or she decides to sell the asset after you die.
If
the asset is your personal residence, this would not be a problem unless
the gain is more than $500,000. 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 or attorney
before you change the title to your living trust.
Other
assets that should probably not be transferred to your trust are incentive
stock options, Section 1244 stock and professional corporations. If you
unsure whether or not to transfer an asset to your trust, check with your
attorney.
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18. What about property
that doesn’t have a title?
Personal property like artwork, clothing, jewelry, cameras, sporting equipment,
books and other household goods typically does not have a formal title.
Your attorney will prepare an assignment to transfer these items to your
trust.
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19. What if I buy new assets after I fund my trust?
Find out if you can take the title initially as trustee of your trust.
If not, transfer the title right away. If you’re not sure how to
transfer it, contact your attorney.
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20. Funding Your Living
Trust (Summary)
Assets You Probably Want in Your Living Trust:
• Real
property (home, land, other real estate)
• Bank/credit union accounts, safe deposit boxes
• Investments (CDs, stocks, mutual funds, etc.)
• Notes payable (money owed to you)
• Life insurance (or use irrevocable trust)
• Business interests, intellectual property
• Oil and gas interests, foreign assets
• Personal untitled property
Assets You May Not Want in Your Living Trust:
• IRA
and other tax-deferred retirement accounts
• Incentive stock options
• Section 1244 stock
• Interests in professional corporations
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NOTE:
This information is designed to provide a general overview with regard
to the subject matter covered and is not state-specific. The authors,
publisher and host are not providing legal, accounting or any other advice
which purports to be specific to your situation. The contents of this
website are believed to be completely reliable. Nevertheless, some material
may be affected by changes in the laws or interpretations of such changes
since the material was entered on the website. If legal advice or other
expert guidance is required, the services of a competent professional
in the field of law, accounting, insurance or investments should be sought.
Price
& Farrington, PLLC - Attorneys and Counselors
at Law
12501 Bellevue-Redmond Road, Suite 215 ....Bellevue,
Washington 98005
Phone: 425.451.3583.. Fax: 425.452.0153 ..E-mail: contact@pricefarrington.com
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