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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.
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 will also change most beneficiary designations to
your trustee.
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 great 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 ever
decide to do so.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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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