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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
Parkwood Office Center - 2370 130th Ave. N.E., Suite
103 - Bellevue, WA 98005
Phone: 425.451.3583.. Fax:
425.522.4818 ..E-mail: admin@pricefarrington.com
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