Frequently Asked Questions – Trust Funding
Frequently Asked Questions – Trust Funding
What Does It Mean to “Fund” your Trust?
The main purpose of having any type of trust is to govern the administration of the property that is in the trust (including the property that will be in it eventually). Because the trust only governs the assets that are in it, the trust is only as good as what it owns. The most common type of trust in estate planning is called a Revocable Trust (also known as a Living Trust). The main purpose of a Revocable Trust is to avoid probate court proceedings when you die.
Essentially, trust funding means transferring your assets into your Revocable Trust. Different categories of assets require different types of action. Here are some “rules of thumb” for funding your trust with some common asset categories:
In Florida, attorneys refer to real estate as “real property.” This is probably the easiest type of asset to coordinate with your Revocable Trust, because generally all it takes is a quitclaim deed. However, the deed needs to be prepared correctly and recorded in the official records in the county where the property is located. If you are transferring your Florida homestead (i.e., your primary residence) to your Revocable Trust, then it is recommended that both the quitclaim deed and the trust document contain special verbiage reserving your homestead rights under the Florida Constitution; this ensures that the property appraiser does not disturb your existing homestead exemption and save-our-homes cap benefits when the deed to trust is recorded.
Your estate planning attorney should prepare an assignment transferring your tangible personal property to your Revocable Trust. Examples of tangible personal property (“TPP”) include motor vehicles, boats and personal watercraft, household goods, appliances, furniture and furnishings, pictures, silverware, china, glass, books, clothing, and jewelry. Following your demise, your Successor Trustee can utilize the assignment of TPP, along with a copy of the trust document and your death certificate, to transfer your motor vehicles and marine vessels at the DMV without the need for probate court or other court order.
Transferring business interests to your Revocable Trust can be accomplished with a relatively simple assignment prepared by your estate planning attorney. However, if your stock or membership units have transfer restrictions, then your attorney should assist you by obtaining permission from the company’s leadership to allow the assignment to the Revocable Trust. This is easy to do and seems to work with every company upon request.
When it comes to regular bank accounts, such as checking, savings and money market accounts, you have two options: make your Revocable Trust the owner of the account or the pay-on-death (“POD”) beneficiary of the account. Depending on the internal rules of your financial institution, making the Trust the owner (‘Plan A”) may be simple or complicated. If your bank fits the latter description, then “Plan B” is to make the Trust the POD beneficiary, which is typically just a matter of updating your beneficiary paperwork at the bank.
Non-retirement investment accounts containing stocks, bonds, mutual funds and ETFs are also relatively easy to coordinate with your Revocable Trust. Once you execute your Revocable Trust, your estate planning attorney should send instructions that all taxable brokerage accounts should be re-titled into the name of the Trust. After this happens, the Trust is considered the owner of the account and thus avoids probate when you die (which is the whole point of your Revocable Trust in the first place). Additionally, if you become incapacitated, your “Successor Trustee” named in the trust document will have quick and relatively seamless access to the account assets and can communicate with your financial advisor freely on your behalf. All of the income tax attributes of the investment account will continue to flow through to you on your personal income tax return (IRS Form 1040).
Accounts that are “qualified” (by the IRS) or otherwise tax-deferred are treated differently by the IRS. You cannot make your Revocable Trust the owner of these accounts (by law) because they must be owned by an individual. Common examples of tax-deferred accounts include retirement accounts such as IRAs, 401(k) accounts, and 403(b) accounts. There are special steps that must be followed to properly coordinate these types of accounts with a Revocable Trust. If your beneficiaries are minors (under age 18 in Florida), inexperienced or bad with money, or suffer from an addiction issue, then it may be worth the extra effort to coordinate your tax-deferred accounts with your Revocable Trust. However, after the passage of the SECURE Act, for most clients it now makes more sense to name individual beneficiaries on their IRAs and 401(k)s. This is because most non-spouse beneficiaries are now required to withdraw the account assets over a mandatory 10-year period. If your beneficiaries are well-adjusted adults, this is a simpler option versus making the account payable to the Trust as an intermediary.
Similar to Traditional IRAs, Roth IRAs can be made payable to a Revocable Trust provided certain tax requirements are met by including specific verbiage in the trust document. As with IRAs, the pros and cons of naming the Revocable Trust vs. naming individual beneficiaries should be discussed with your estate planning attorney.
It is simple to make your Revocable Trust the beneficiary of your life insurance policy. When you die, the insurance company will pay the death proceeds to your Successor Trustee, which can provide your Trustee with great flexibility and liquidity to pay any income or estate taxes that are due, property taxes and insurance, and generally to have cash available to meet the needs of your beneficiaries.
Frequently Asked Questions – Trust Funding
The taxpayer ID number for a revocable living Trust is the grantor(s) or trustor(s) social security number. If a married couple has a joint Trust and both are listed as grantors, either social security number may be used for joint assets. This is in accordance with Treasury Regulation Section 301.6109-1(a)(2). Most financial institutions or investment companies will only allow you to use one social security number.
In your Funding Instructions, we have recommended language for how your assets should be retitled. Any description referring to the Trust will be effective if it reasonably identifies your Trust or indicates that the Trust property is held in a fiduciary capacity. Title to your Trust may be expressed as provided in the following example: John Doe, Trustee of the John Doe Trust, dated “Your Trust Date” or, John Doe, Trustee under the John Doe Trust, dated “Your Trust Date” or, John Doe, Trustee of the John Doe Trust, uta “Your Trust Date”
The “Pour Over Will” directs that all assets left outside the Trust be transferred to the Trust at death. However, those assets must go through probate, unless a beneficiary has been designated.
Yes. Retirement accounts, life insurance policies, annuity contracts, long term care policy, auto or umbrella liability policy, social security, safe deposit boxes, vehicles and 529 plans. Please refer to your Trust Funding Instructions for further information.
Not while you are alive. During your lifetime, retirement accounts (such as IRA’s, 401(K)’s, 403(b)’s, TSPs, Roth IRA’s,
KEOGH, SEP-IRA’s, and Profit-Sharing plans, etc.) must remain in the owner’s name. However, it may be appropriate to name new beneficiaries. Please refer to “Retirement Accounts” in your Trust Funding Instructions to determine who your attorney-of-record advises for the beneficiary designations.
Trust? Almost all financial institutions or companies have their own form(s) they require for new account registrations and beneficiary designations.
For local banks we recommend you visit the bank in person and take your Estate Plan binder with you. Ask the bank to re-register bank accounts into the name of your Trust, which will also include the names of the Trustee(s). If more than one Trustee is serving, such accounts may also be titled using the grammatical conjunction “or” as either Trustee may act independently. Please refer to your Trust Funding Instructions for further information.
It is not necessary to have the Trust name printed on your check after your names. It is only essential that the signature card held by the bank bears the correct Trust designation.
You may close the account and open a new account in the name of your Trust, or you may ask the bank for a Payable on Death (POD) beneficiary form to designate your Trust as the beneficiary, which will ensure the account avoids probate. Please refer to your Trust Funding Instructions for further information.
No, your 529 plan will not be retitled into your Trust. For this type of college fund account, we recommend naming your Trust as the alternate or successor owner, if it is permissible. Check with your 529 plan administer.
Since these assets have no registered title and no formal recognized transfer procedure, the Trust contains language “generally assigning” all of your tangible personal property to your Trust. Alternatively, transfer of ownership of any asset to the Trust can be initiated, and in some cases perfected, by signing a so-called “General Assignment” instrument directing transfer of “all rights, title and interest in and to” the property to the Trustee. There is a General Assignment that you executed at the Signing Meeting.
Inside your Estate Plan binder there is a tab, “Distribution of Tangible Personal Property” where you can find your Personal Property Memorandum. You may use this form to list items to be given to specific people and amend it at any time. Careful as it is a legally binding document.
No. If there are liabilities associated with your assets, the liabilities follow the assets. You will transfer your real estate into your Trust. However, it is not necessary to transfer the mortgage liability to your Trust.
No. This exemption will still be available to you.
Can the mortgage company “call” my mortgage? No. Transferring your home into your Trust will not affect your mortgage because you have not given away a beneficial interest in the property. However, if you are transferring commercial property to your Trust such as an office building, multi-unit apartment, office condo, you must obtain the lender’s permission to transfer the property to your Trust.
Yes. Your Trust is revocable. You may spend your assets, give assets away, and transfer assets back into your name without restriction. However, after a Trustor dies, depending on your type of trust, this power may change.
In your Funding Instructions, we have recommended language for how your assets should be retitled. Title to your Trust may be expressed as provided in the following example: John Doe, Trustee under the John Doe Trust, dated “Your Trust Date”.
We are able to prepare deeds for any county in Florida. Before commencing any work, we will quote you a fee for the preparation of the deed and any government recording costs. Once we receive your approval, we will prepare a deed retitling the property to your Trust. We will also prepare any necessary transfer forms and record them along with deed. The timeline for the retitling process varies based on the location of the property.
Be prepared to provide the settlement company with a copy of your Certificate of Trust. The title company will be issuing and title insurance policy to the buyer and the buyer’s mortgage company. They want to make sure that the trust agreement is valid and gives you the power to sell real estate.
Your mortgage and any home equity loan on your real estate is owned by the lender, and so you do not transfer it to your Trust. The lien that the lender has to ensure repayment of the loan follows the property into the trust.
Clients who use Revocable Trusts as the main vehicle of their estate plans should always have a “Pour-over Will” to supplement the Trust. A Pour-over-Will supplements the Revocable Trust by instructing the probate court that any assets not transferred to trust or otherwise designated to a beneficiary should be transferred to the Revocable Trust at the conclusion of the probate proceeding. For this reason, it is imperative that every client who has a Revocable Trust also have a Pour-over-Will to accompany it.