Working with an attorney to draft a trust agreement for estate planning purposes is an important step. But just getting the document drafted and signed is not enough. For any trust to be effective, you must complete the process of funding your trust as soon as you can. But what exactly is funding?
Generally, Duvall Law Firm clients are provided with a deed to transfer their home into their Trust. The transfer of the house contents is accomplished via an assignment of Personal Property. Then, their execution of a Pour Over Will transfers the net result of their probate estate into the Trust. Your concern should be to minimize involvement of the probate process by maximizing the probate-lessening benefit of your trust.
Funding the trust in advance is important. The goal is to achieve less than $100,000 probated at the first spouse’s death and no more than $50,000 probated at the survivor’s death. Achieving that goal allows probate to be administered as a “Small Estate” without all of the intricacies and reporting requirements of what will otherwise be a “Large Estate”.
A common way to think about funding is to imagine your trust as an empty bucket. For that bucket to be useful, it needs to be filled with something. In the case of a trust, that something is your money and property. Funding, therefore, is the process of moving your money and property into the bucket. Technically, the funding process involves retitling your accounts and property in the name of your trust. There are two ways to move money and property into a trust: (1) by transferring ownership of your accounts and property from you as an individual to yourself as the trustee of your trust and (2) by completing beneficiary designations, naming the trust as the beneficiary, on other types of property such as life insurance and, in some cases, retirement accounts.
When you own property in the name of your trust, if you become incapacitated (unable to make your own decisions or manage your affairs) or die, that bucket can be quickly and easily handed to a successor trustee who has the right and responsibility to use the accounts and property for your and your trust’s beneficiaries. And because it is a trust, no court proceeding (called probate) will be required for the transition of responsibility to a successor trustee or oversight of the trust’s management. It is important to remember that only fully funded living trusts allow your loved ones to avoid probate.
Please keep in mind that properly funding your trust will often involve working with financial institutions to change account ownership to the trust’s name; in the case of real property, it may require you to sign a new deed and record it with the county recorder. There are several different ways to ensure that your trust owns your accounts and property. Below are some of the most important and common types of property that you should transfer into your trust and how to accomplish it.
Checking and Savings (Cash) Accounts
You should routinely fund checking, savings, money market, and certificate of deposit (CD) accounts of substantial value into your trust. You can achieve this by working with the bank or credit union where you have the accounts and providing them with a certificate of trust that lists important information the financial institution will need to complete the retitling of those accounts.
Before retitling CDs into your trust, you should first check to make sure that no early withdrawal penalties will apply. If a penalty will apply, you may need to wait until those CDs mature and then make the transfer. In most cases, it is not necessary or even desirable to have the bank issue new checks with the trust’s name on them.
Real Estate and Real Property Interests
For your personal residence or other real estate, as well as associated real property interests such as mineral or timber rights, you will need to enlist the help of an attorney to properly identify the interests and prepare, sign, and record real property deeds that transfer those interests into your trust. It is crucial to work with an experienced attorney on this important aspect of funding your trust so that you fully understand any property tax or other legal implications that may result from such a transfer.
As with your cash accounts, you should work with your financial advisor or brokerage account custodian to complete the necessary paperwork to retitle investment accounts in the name of your trust. A certificate of trust will normally be necessary, and in any event, the financial institution can refer to the information in the certificate of trust to properly complete its required paperwork.
You can transfer your personal effects such as furniture, jewelry, clothing, books, photos and journals, artwork, coin and stamp collections, and tools into your trust by signing an assignment of personal property. You can also transfer vehicles registered with your state’s department of motor vehicles into your trust, but many attorneys advise against doing so given the tax and registration considerations, the casualty insurance complications that can arise, and the potentially greater risk of litigation when a vehicle owned by a trust is involved in an accident. In some cases, it can be advisable, but there are pros and cons that should be weighed first. Your trust attorney can explain more about the considerations relevant to transferring motor vehicles into your trust.
Ownership of retirement assets such as individual retirement accounts (IRAs) and 401k plans should never be transferred to a trust. Doing so can result in serious negative tax consequences for the plan’s owner. However, under some limited circumstances, it may be advisable to name the trust as either a primary or a contingent beneficiary of the retirement plan. It is crucial to understand the potential tax consequences of naming a trust as a beneficiary of such a plan. Often, the tax consequences must be carefully balanced against the plan owner’s desire to protect the proceeds of the plan from the risks associated with potential lawsuits, divorces, bankruptcies, or other creditors of the beneficiaries. Coordinating the beneficiary designations on your retirement plans to complement your trust and estate planning is extremely important, and you should thoroughly discuss any changes with your attorney prior to making them.
Life Insurance and Annuities
Generally, life insurance and annuity investments should name your trust as the primary beneficiary so that the trust can control and protect the proceeds of those policies. Thereafter, it is customary to name your spouse, partner, or children as secondary (or contingent) beneficiaries on such policies. To make these changes, contact your insurance agent to obtain the appropriate beneficiary designation forms. It is increasingly common for insurance companies to make these forms available online so that no paper is involved in the process. If that is the case, make sure to get a written confirmation or even print or take a screenshot of the confirmation page when you complete the process so that you have proof of the changes you made and when you made them. Keep the confirmations with your other trust documents.
Other Assets to Fund into Your Trust
The types of property discussed above are some of the most common that people transfer into their trusts. But you can probably think of plenty of other types of property that you may want to transfer as well. This is particularly true if your goal is to avoid probate and ensure that the trust can protect and manage your property in the case of your incapacity or after the property passes to your spouse, children, or other beneficiaries at your death. The following are additional types of property that you will likely need to transfer into your trust:
- mortgages, loans, promissory notes, or other receivables
- business interests such as partnerships, LLCs, sole proprietorships, or small business stock
- royalties from books and art such as music and recorded performances
- trademarks and copyrights
- digital assets such as income streams from online content (blogs, social media channels, etc.)
- college savings plans (529 plans)
- health savings accounts
Each of these types of property has special characteristics you should consider when transferring ownership to a trust. Although it may seem complicated, that is why we are here. We can help you think through the many issues associated with transferring property into your trust so you can feel confident that when it comes time for a successor trustee to take over your trust’s management, everything is taken care of. Call us today if you have specific questions about how to properly coordinate ownership of your property with your trust.