Basics of Estate Planning: Funding Your Trust

Property you own can be transferred to your heirs or chosen beneficiaries upon your death in one of several ways. If the particular asset is owned by you and another individual, as in the case of a residence which you jointly own with your spouse with a right of survivorship (JWROS), the property will automatically pass to your spouse upon your death. Assets may also pass by means of a beneficiary designation, such as in a transfer on death deed or in a pay on death account with your bank. A third possibility is property passing via the probate process, either in accordance with your will or (in the absence of a will) in accordance with the laws of intestacy.

A fourth means of transferring ownership of your assets is by means of a trust agreement, such as a revocable living trust. This method offers a number of advantages as the choice component of an estate plan. A well-designed trust agreement can be the vehicle by which your assets are transferred after you die. In addition, the trust can include detailed instructions as to how your assets should be managed by your appointed successor trustee in the event you become incapable of managing them yourself. However, in order to take full advantage of a trust’s benefits, your assets must first be placed in the trust.

When your estate planning lawyer refers to funding your trust, he/she is talking about placing your assets into the trust. Let’s look at some basic principles relating to this important, but often overlooked, aspect of creating a trust as the foundation of your estate plan.

What is so important about funding the trust?

A well-designed trust agreement is but an empty shell and of little or no value to you (the settlor) or your intended beneficiaries unless it actually holds your assets. Should you die prior to placing your assets in the trust, those assets will likely be subject to the probate process (unless they are otherwise held JWROS or pass in accordance with beneficiary designations. However, assets which are retitled in the name of the trust will immediately be subject to the management and control of your chosen successor trustee.

Should I transfer all of my assets into my trust?

Not necessarily. It is true that many of your assets should be transferred as soon as the trust has been created, including such assets as the following: your personal residence; stocks, bonds and mutual funds you own in your own name; checking/savings accounts and certificates of deposit; personal property and collectibles; business interests, such as stock in corporations you own, partnership interests and membership interests in limited liability companies; and, your intellectual property rights, such as patents, trademarks and copyrights. An important aspect of establishing your trust should include a comprehensive review of all of your assets with your estate planning lawyer in order to determine which of those assets should be transferred to the trust.

Why not just transfer all of my assets into the trust?

There are a few categories of assets which should not be owned by your trust. For example, any individual retirement accounts, pension plans and 401k accounts should not be owned by your trust. A transfer of such retirement plans to your trust may well be treated by the IRS as a taxable distribution of the entire account, and thereby trigger an unwanted tax liability to you. In general, you would do well to remember that estate planning with respect to retirement plans is a complex subject area and one that should be addressed with your lawyer.

If you own a second home, either as rental property or as a vacation home, you should also carefully consider whether transfer of that property to the trust is advisable. Is this property subject to a mortgage which includes a “due on transfer” provision? If so, your lender may treat a transfer of the property to your trust as triggering your obligation to pay the loan in full. Again, this is an area you need to discuss with your estate planner.

How do I go about transferring those assets which should be placed in my trust?

The answer here is: it depends on the particular asset being transferred. You would transfer your residence into the trust by recording a quit claim deed in the real property records in the county in which the property is located. So, for example, if you are the sole owner of the real property, you (being the grantor) would transfer the property to “yourself as trustee of the [name] of the trust”, as grantee. You will want to be careful here to not merely title the property in the name of the trust. A transfer to “the John Doe Trust,” may not be recognized as legally effective; instead, the transfer should be to “John Doe, Trustee, of the John Doe Trust under agreement dated January 1, 2001”.

Your checking accounts, savings accounts and certificates of deposit can be transferred to your trust by asking your bank to provide you with the appropriate signature cards, which will then need to be signed by the current trustees of your newly created trust.

Will I need to have new checks issued to me in name of the trust?

Most likely, you should not have to do that. Retitling your checking account in the name of the trust should not have any effect on the account holder’s name printed on your checks.

How do I transfer stocks and mutual funds I own?

Assuming your shares and mutual funds are held by your broker, you will need to instruct your broker to change the title of your personal accounts to the name of your trust. This may involve completing a new brokerage account application. Your broker may require you to provide evidence of the trust’s existence, in which case you will need your lawyer to draft a certificate of trust to be signed by you as settlor.

If you are holding original stock certificates for a publicly traded company, you may need to open a brokerage or investment account in the name of your trust, and then deposit the original stock certificates with the brokerage or you may need to contact the transfer agent designated by the corporation which issued the stock and follow their instructions for retitling the stock in the name of your trust.

What if I own interests in a partnership or limited liability company (LLC)?

You will need to transfer your partnership or LLC membership interest to your trust by means of a written assignment of interest signed by you and acknowledged by the managing partner or managing member of the LLC. You should first review the governing partnership/LLC operating agreement to ensure that the agreement does not preclude such a transfer.

Do I need to title my car and RV in the name of the trust?

Although you can transfer title of your personal vehicle(s) and/or RV(s) to your trust, it might well be preferable not to do so. If you have a vehicle accident, the fact that your vehicle is titled in the name of your trust might result in the injured party believing you have deep pockets, thereby encouraging a lawsuit. You might be better advised to segregate a high-risk asset (such as your vehicle) from your lower risk assets.

To summarize, employing a revocable living trust as the foundation of your estate plan will allow your assets to be distributed after your death without having to go through the probate process. Having a trust will also allow your chosen successor trustee to manage your property while you are incapacitated, thereby avoiding the necessity of an expensive guardianship or conservatorship process administered by a court. However, in order to fully realize the benefits of a trust, you must properly fund your trust. We recommend you use the above guidelines as the basis for a comprehensive review of your assets and discussion with your estate planning attorney.

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