In our previous article, Crash Course in Wills and Trusts: Part I, we discussed the importance of a good estate plan and introduced you to the basic elements of such a plan. In Trusts and Wills: Which is Right for You?, we generally recommended a revocable living trust over a will as the primary vehicle for your estate plan. This week, we will explain the trust funding process. Hopefully, we will be able to help you determine which parts of the process you can accomplish without an attorney, with the aim of reducing your legal fees.
As we explained in the above articles, trusts are legal instruments that direct how certain property will be distributed and maintained. However, your property must generally be transferred to a trust before it will be subject to the trust’s provisions. In this respect, trusts differ from wills, which must merely describe the property in question and indicate how you wish the property to be distributed.Before we dive into how to fund your trust, a few notes:
- You Retain Control: If you are worried about transferring title to your property to your revocable living trust, never fear. In most cases the creator of a revocable living trust is also both the trustee and beneficiary of the trust during his or her lifetime. This means that if you transfer your assets into a revocable living trust, you will retain the same amount of control over those assets during your lifetime that you had prior to the transfer. You will always have the ability to revoke or amend the trust.
- You Don’t Have to Transfer All of Your Assets: If certain assets totaling less than $100,000 have not been transferred into your trust at the time of your death, the executor can file a small estate affidavit. This affidavit will act to sweep up to $100,000 of personal property (i.e. property that is not real estate) into your trust, allowing this property to avoid probate. For this reason, we generally do not recommend transferring your primary checking account into your trust. The small estate affidavit can also cover your cars and furniture so long as the total amount of personal property that you leave out of your trust totals less than $100,000.
- You Must Transfer SOME Property to Your Trust: Trusts are not legally effective until they have been funded with at least SOME property. This means that you cannot rely on the small estate affidavit to sweep ALL of your property into the trust upon your death. If your trust is drafted, but does not possess title to any property at your death, your estate will be treated as if no trust was in place at al
So, once your trust is drafted, how do you go about transferring your property to the trust, and how much of this process can you accomplish on your own? The answer to this question depends on the type of property you are trying to transfer, the amount of time you are willing to personally allocate to trust funding, and your comfort level in dealing personally with financial institutions and forms. Your attorney should provide you with an outline of the steps necessary to fund your trust, based on your particular asset structure, at which point you will be able to decide which steps you would prefer to handle on your own.
Below is a list of the steps necessary to transfer particular types of assets to your trust:
- Retirement Accounts: The institution that manages your accounts can provide you with forms to change the beneficiary designation for your account. We generally recommend that if you are married, you name your spouse as the primary beneficiary and the trust as successor beneficiary.
- Stocks and Mutual Funds: In order to transfer stocks or mutual funds, you should fill out a stock assignment form supplied by your brokerage company.
- Bonds: Savings bonds can be transferred to your account by filling out form PD F 1851 E, which can be obtained from www.savingsbonds.gov.
- Life Insurance: Your insurance provider will be able to provide you with change of beneficiary forms. Like your retirement account, you should generally name your spouse as the primary beneficiary and the trust as the successor beneficiary. Check out this article for a more in-depth conversation about life insurance policies and revocable living trusts.
- Business Interests: If you are the owner or part owner of a closely held corporation or LLC, you should either transfer your shares of the company to the trust or amend the company’s bylaws or operating agreement to deal with succession of shares upon your death. The most effective way to accomplish your goals with respect to your company will depend on your individual circumstances. This process should be handled by your attorney.
- Real Estate: Generally, you should execute a deed transferring your real estate to the trust. Again, the best way to handle this process will depend on your individual circumstances and goals. This is another step that should always be handled by your attorney. Once drafted, you or your attorney must record the deed with your county’s Recorder of Deeds.
- Bank Accounts: Depending on the amount of personal property you possess, it may be advisable to transfer your savings accounts, and possibly even your checking accounts, to the trust. This can be accomplished by delivering a letter of instruction to the bank retitling such accounts so that they are held by the trust.
- Remaining Personal Property: Again, depending on the amount of personal property you own, it may be advisable to transfer all of your personal property (e.g. furniture, art, heirlooms, etc.) en masse, to the trust. To accomplish this, your attorney should draft a quitclaim bill of sale.
Even the most savvy individuals should leave real estate transfers, business asset transfers, and quitclaim bills of sale to their attorneys. However, depending on your tolerance for dealing with financial institutions, you may be able to save on legal fees by personally handling, after consultation with your attorney, the transfer of your retirement accounts, life insurance policies, stocks, mutual founds, bonds, and bank accounts.