The Importance of “Trust Funding”
One of the significant benefits of utilizing a living trust as part of one’s estate plan is to avoid the necessity of a surviving spouse or heirs from having to probate your assets with a probate court after your death. However, this benefit is not achieved by simply drafting and signing a living trust. The title to assets actually has to be transferred from an individual and/or their spouse to the trust during their lifetime in order to achieve the goal of avoiding probate.
Trust Funding for Basic Joint and Individual Trusts
I oftentimes use the example with my clients that a trust is like a “bucket.” I tell them to visualize placing assets into a “bucket,” specifying that those assets placed in the bucket during their lifetime are completely accessible – i.e., they can be put into and taken out of the bucket anytime they desire. Assets remaining in the bucket at the time of the client’s death avoid probate. The reason assets in the “bucket” avoid probate is that the title to the asset is vested in the trust. The successor trustee appointed in the trust has the legal authority to access, transfer or otherwise dispose of the trust assets pursuant to the terms of the trust without having to obtain legal authority to act on behalf of the decedent with respect to a descendant’s assets from the probate court.
Trust Funding for Tax Planning
Several clients have what we commonly refer to as “married separate trusts,” where both spouses have their own trust not only for purposes of avoiding probate, but also for accomplishing tax planning goals to minimize federal estate tax after both spouses are deceased. While the use of separate trusts will decline in the future now that the overall amount of married couples that can pass estate tax-free without having to draft married separate trusts is more than $10 million, some couples with a significant net worth still will want to exercise caution to make sure that assets are transferred as equally in value as possible into that respective individual’s trust.
In addition, other types of irrevocable trusts, irrevocable life insurance trusts (ILIT) and qualified personal residence trusts (QPRT) need to be fully funded in order to accomplish tax planning goals for which they are set up to achieve.
General Rules for Trust Funding
In general, please note the following funding instructions for trust agreements:
A. Real Estate. You should execute quit claim deeds to transfer title to any real estate you own to your trusts. As long as you are the trustee and beneficiary of your trust, any transfer of real estate to a trust usually avoids any negative income or property tax matters.
B. Life Insurance. I recommend that your life insurance name your trust as the beneficiary.
C. Retirement Benefits. This would include your 401(k), IRA, SEP or other retirement plans. I would recommend that you name your spouse (if you are married) as a primary beneficiary and adult children as the contingent beneficiary.Are the children all grown and receiving their distributions immediately? Then they should be the beneficiaries. If children are minors and/or are receiving their distributions over time, then the trust should be the beneficiary. The only situation where we recommend the trust be a beneficiary of retirement accounts is where your children are minors and you may want the trust to receive retirement assets in the event of your death to maintain control of the assets.
D. Annuities. If you have or acquire any annuities, you should name your trust as the beneficiary of each annuity.
E. Bank Accounts. I recommend that savings accounts, money market accounts and certificates of deposit be registered in the name of your trust. The accounts should be registered as follows:
“<Your Name> of THE <YOUR NAME> LIVING TRUST.”
This registration must be on the signature card held by the financial institution.
You may also choose to place your checking account in the name of the trust, or you may place the checking account in joint names, provided that your average account balance is less than $18,000. When checks are printed for this account, they should either reflect the name of the trust or should show your name with a designation, “TTEE,” representing trustee, in the upper-left-hand corner of the check.
The bank will require some proof of the existence of your trust. You may provide the bank with proof of your trust by providing it with a Certificate of Trust Existence and Authority, found in the “Certificates” section of your estate planning portfolio. A sample letter to transfer your bank account is found under the “Transfers” section of your estate planning portfolio.
F. Credit Unions. Some credit unions will not allow you to title your account in the name of your trust. If your credit union has this policy, please ask if you can make your trust the beneficiary of the account.
G. Stocks and Bonds. Any stocks and bonds you presently own or acquire after the date of the trust should be titled in the name of your trust. The easiest way to transfer these assets is to have them in a brokerage account, and have the brokerage account registered in the name of the trust. This can usually be accomplished by sending your broker a copy of the Certificate of Trust together with an instruction letter. A sample instruction letter is found under the “Transfers” section of your estate planning portfolio.
H. Mutual Funds. It is essential that any mutual funds be titled in the name of your trust. You may transfer the title to your mutual funds by using the sample letter found under the “Transfers” section of your estate planning portfolio. Please note that most mutual fund administrators require that your signature on this request letter be “medallion guaranteed,” which can be provided by your banker or broker.
I. Automobiles. I do not recommend that automobiles be registered in the name of the trust. It is my recommendation that an automobile be owned by the principal driver of that vehicle. I do not recommend joint ownership of your automobiles.
J. Personal Property. Your personal property such as household furniture, furnishings, jewelry, etc., does not have documentation of title or deeds; therefore, you can usually rely upon the language of the trust to transfer the ownership of this property to your trust. These items may be disposed of by your Distribution Memorandum in this Estate Planning Portfolio. For the Distribution Memorandum to be effective, it must be in your own handwriting, dated and signed.
Based on my experience in assisting clients with estate planning, trust funding and follow-up action with respect to a person’s estate plan after the original planning documents are executed tends to be one of the most neglected aspects of the estate planning process. Unfortunately, an individual’s failure to follow up with respect to his or her estate plan, including following through to fund trust agreements, can oftentimes lead to unintended consequences where the overall benefits of the plan are diminished based on the failure of an individual to take action prior to his or her death.
In the event you have a trust, I encourage you to review the title to your assets and various beneficiary designations to make sure that your affairs are in order with respect to the titling of your assets, and that the transfer of assets at your death by beneficiary designations are how you intend them to be.