Introduction:
Most Californians utilize a revocable intervivos (living) trust to pass their estates to the next generation. Using the trust method avoids the need for formal public probate to achieve that transfer saving both time and money. A typical probate requires the executor and attorney to receive fees and costs incurred (perhaps thirty thousand dollars per million transferred) as set by the court, takes about a year, and is a public process in which all of one’s assets are a matter of public record.
Transferring by a living (intervivos) trust allows the same transfer to occur, usually in a few months at a fraction of the fees. It is also a private transfer.
Note that estate taxes are the same for use of the trust or formal probate in most circumstances, but the saving in other costs and fees and the ease of the transfer convince most persons to use the trust as the preferred method of estate planning.
However, for it to be effective, the trust has to actually legally own the assets. This simple fact is all too often ignored by the people creating the trust (“trustors”) who either fail to transfer the assets into the trust or obtain assets after creation of the trust and then fail to transfer the assets into the trust. The results can be catastrophic.
Failure to Transfer an Asset Into the Trust:
Your complex and well thought out trust will not apply to assets not legally transferred into the trust. Usually, those assets will have to go through formal probate, possibly taking years to transfer and costing more money to accomplish. A typical example is that a father creates a trust for his family, places his assets into it, then purchases real property or sets up other brokerage accounts after the trust is created, fails to put those assets into the trust due to press of other business, then dies. The trust applies to what he put in, but formal probate has to be performed for the real property and assets not placed into the trust. Both the trust and the probate transfers must occur separately.
There is a procedure for real property not transferred into the trust by deed but described in the trust which can allow the court to conclude that it was meant to be in the trust and allow it to be considered part of the trust. However, bringing such a motion is, itself, both public and does cost money, and the courts have to determine that the precise property was meant to be in the trust. The courts do not always grant those petitions and can conclude that the transfer was not intended. And for most assets not so transferred, probate will be required, thus defeating much of the purpose of having the trust.
Often, we see clients in which the decedent, close to death, realized his or her mistake and makes a list of assets he or she wants to be considered as part of the trust then dies before legal transfer can occur. Usually, such lists are not sufficient to actually transfer the assets. For real property, a title deed from the trustor into the trust is required. For brokerage accounts or financial instruments, the trust be formally named as the owner. The last-minute list of wishes is not legal transfer.
Note that one advantage of a trust is to allow gifts after death to be held in trust and only transferred based on events that occur after death. Often, parents want children to complete college before receiving the funds. At times, the trustee is instructed to give more of the assets to a child who is injured or permanently disabled. Unless a “pour over” will is created, those special instructions will not work if the asset is not in a trust.
The “Pour Over” Will:
Any experienced estate planning attorney will also have the client execute a “pour over” will that provides that if any asset is not transferred into the trust, then the probate will occur but the assets in the probate will be distributed to the trust to be distributed in accordance with their directions. It also normally states that if for any reason the trust is not valid, its terms are incorporated into the will which will then seek to distribute the assets in accord with the trust provisions.
Note that while the pour over will may save the intentions of the testator, it will not avoid probate with the consequent costs and delays.
What to Do?
It is simple if often time consuming. The instructions we give our clients, in generic form, are below. Each state has its own requirements and your own assets may not fit fully within the instructions outlined below, but this should give you a good basic idea of the steps you must take to make your trust truly effective. And note that if you acquire assets after the creation of the trust, you must transfer those into the trust as well.
Most law firms will assist you in your efforts and have legal assistants trained to make the transfers, but a person of average intelligence can also accomplish the tasks, using legal help if encountering resistance from any brokerage house or title company.
It should be remembered that trusts are not uniformally used within the United States. While California uses them a great deal, some other states do not use them, having smaller populations and faster and less expensive probate procedures. Further, the concept of trusts is unique to the United States and some other nations with Anglo law origins. Most nations do not recognize the concept of a trust at all and local counsel or experienced international counsel should be consulted before assets located abroad are attempted to be transferred into a trust. In some instances, such as Israel, the transfer into the trust could have significant adverse tax consequences.
The instructions below should only be used after consulting legal counsel as to their applicability to your particular situation:
Revocable Living Trust Funding Instructions
Now that you have created your trust, you have one more vital task: to actually place your assets into the Trust. A Trust which has no assets is a nullity. Unless you transfer an asset into the trust, the trust will not have any legal effect on the asset either before or after death.
We cannot overemphasize the importance of having a fully funded Revocable Living Trust. An unfunded or partially funded Revocable Living Trust does not avoid probate and can lead to complications in transferring assets. The “final” step in creating your trust is to transfer the assets into it and this final step is as vital as all the other steps.
These instructions will help you fund your Revocable Living Trust.
Changes in Title of Asset.
• You should make ownership changes to change the title of most of your assets from your name as an individual to your name as Trustee of your trust. In most cases the new title will be held as follows: “X, Trustee of the X Family Trust.”
• For other assets, such as life insurance and retirement accounts, you will make beneficiary changes to properly distribute those assets upon your death. The beneficiary will not necessarily be your Revocable Living Trust–please see the Retirement Plans and Life Insurance and Annuities sections of this document.
- Generally, to transfer assets to your trust, you must execute new documents of title,
(typically, deeds to real property,) and signature cards for your bank accounts, as well as change of beneficiary forms for pension plans, individual retirement plans, and life insurance. Your financial advisor, accountant, broker, or life insurance agent may need to help you make ownership or beneficiary changes.
- These instructions will give you general knowledge of how to fund your trust, but they cannot
comprehensively address every type of transfer. Please call us if you must make transfers that are not
addressed in these instructions.
We recommend you place copies of all written documents that evidence the assets of
your Revocable Living Trust into your Revocable Living Trust binder. These assets may
include your accounts, real property, business interests, insurance policy proceeds, or
any other property. Your final step in the transfer process should always be to place a
document in the TRUST ASSETS section of your Revocable Living Trust binder that
proves your trust is the owner or beneficiary of each asset. The bolded, italicized
sentence ending the transfer instructions for each type of asset tells you what documents
to put into your Revocable Living Trust file.
- Using Your Certification of Trust
We have prepared for your use a Certification of Trust. In your certification, you state in writing that:
- your trust exists;
- you are one of the Trustees; and
- you have the authority and power to transact business as a Trustee.
Many institutions have their own certification forms for you to fill out. If the institution
you are dealing with does not have a form, you should provide them with a copy of your
Certification of Trust form. Your Certification of Trust provides only the information that
the persons you deal with need to see without disclosing confidential details that providing the entire
trust would entail.
- Your Tax Identification Number
As long as you are acting as Trustee of your Revocable Living Trust, you do not need to
obtain a separate tax identification number for your trust or to file a separate trust tax
return. The Internal Revenue Service (IRS) prefers that you use your own Social Security
number. You should report all of the income generated by trust assets on your personal
IRS Form 1040 and California Form 540.
When you die, your trust becomes irrevocable for tax purposes. It may split into multiple
trusts, each of which may be treated as a separate taxable entity for income tax purposes.
We will work with your successor Trustee and your accountant to see that your heirs get
the full benefit of your estate planning upon your death.
- Titling Assets in Your Name as Trustee
Generally, you should title all of your currently owned and newly acquired assets in the
name of your trust. We prefer the following format for titling assets in the name of your
trust:
[Name of Trustees], Trustee, or their successors in interest, of
the [trust name] dated _______________________, 20___, and
any amendments thereto.
- Instructions for Transferring Specific Assets
Cash Accounts
You should sign new signature and ownership cards to retitle any sizeable bank accounts
or cash equivalents, including treasury bills, money market accounts, and certificates of
deposit, to name yourself as Trustee of those accounts. You need not change any small
joint or other checking accounts used primarily for household expenses.
Before you retitle your certificates of deposit, consult with a bank officer to make sure
that the institution does not consider the change in account name to be an early
withdrawal that incurs a penalty. Generally, this should not be a problem because your
tax identification number for the account will remain the same.
Instruct your financial institution by letter or in person to change the title to your trust.
The tax identification number (your Social Security number) on the account for withholding
and reporting purposes will remain the same. For joint trustee trusts, be sure to give
each trustee signature power with respect to the account. Sign the new signature cards
as Trustees.
Retitling the account records should have no effect on the name you wish to have printed
on your checks. There is no reason to have the name of your trust on your printed checks.
Ask your bank to continue to print your individual name on the checks.
After changing title, your next account statement will confirm the retitling by listing you
as Trustee of your trust. Please put a copy of this account statement in the TRUST
ASSETS section of your Revocable Living Trust Portfolio.
Investment Accounts
If you hold publicly traded stocks and bonds that are already in brokerage or investment
accounts, contact your brokers or custodians and direct them to change the title of the
accounts to the name of your trust. The procedure for doing so is the same as the
procedure for retitling cash accounts explained above. You may have to complete new
account applications and present a copy of your Affidavit or Certification of Trust in order
to change the title. Title to the accounts should be in the trust name.
After changing title, your next account statement will confirm the retitling by listing you
as Trustee of your trust. Please put a copy of this account statement in the TRUST
ASSETS section of your Revocable Living Trust Portfolio.
Stocks and Bonds Not Held in Investment Accounts
If you possess original stock or bond certificates, there are two ways to transfer the
certificates to your trust.
- Open a brokerage or investment account in the name of your Revocable Living
Trust and deposit your original certificates in the account. (You may later have
your broker deliver the certificates to you made out in the name of the trust if you
wish.) Your future account statements, titled in the name of your Revocable Living
Trust, will prove your ownership of the transferred stock or bonds. Please be sure
to put a copy of an account statement proving ownership by the trust into the
TRUST ASSETS section of your Revocable Living Trust Portfolio.
- Work directly with the transfer agent for the stock or bond and direct the agent
to reissue your stock with your Revocable Living Trust named as the new owner.
Please be sure to put a copy of both the front and back of the new bond or stock
certificate in the TRUST ASSETS section of your Revocable Living Trust Portfolio.
- Stock Options
Transferring or assigning stock options requires a careful analysis of the tax and legal
issues. We recommend you ask your Certified Public Accountant (CPA) and your stock
plan administrator about your choices in assigning your interests to your Revocable
Living Trust. If you would like us to assist you, we would be willing to do so under a
separate representation agreement.
- Personal Effects
Tangible personal property refers to such items as household furnishings, appliances and
fixtures, works of art, motor vehicles, pictures, collectibles, personal wearing apparel and
jewelry, books, sporting goods, and hobby paraphernalia. Your tangible personal
property has been transferred to your Revocable Living Trust by declaration in Article
One of the Trust.
Your personal vehicles can be titled in the name of your Revocable Living Trust, but we
find that most of our clients prefer to leave their vehicles outside their trust for several
reasons. One, if they have a vehicle accident, the fact they have a Revocable Living Trust
could cause the other parties to the accident to assume they have deep pockets and
encourage a lawsuit. Second, heirs can usually transfer vehicles without formal probate
proceedings. If you decide to title your vehicle in the name of your trust, consult your
casualty insurance agent to make certain the transfer will not result in a business rating
on your insurance policy that would increase your premiums.
- Retirement Plans
You should never transfer the ownership of a qualified retirement or pension plan or
individual retirement account to your Revocable Living Trust. Instead, if you have preretirement
death benefits under such a plan, our general recommendation is that you
choose from among your spouse, children, or partner as primary and contingent
beneficiaries.
Making the proper beneficiary designations for retirement plans involve many complex
tax and individual family issues. Therefore, making a recommendation without further
consultation is difficult. You have many trade-offs to consider in naming your
beneficiaries–tradeoffs that affect your required minimum distributions and the taxation
of your benefits after your death.
If you would like to discuss the issues and solutions for designating your retirement plan
beneficiaries to best match your unique goals, we would be pleased to do so. But
additional planning must be done under a subsequent written representation
agreement.
Your retirement plan administrator should send you a letter confirming the change of
beneficiaries in your retirement plan records. Please put a copy of this confirmation letter
in the TRUST ASSETS section of your Revocable Living Trust Portfolio.1
- Qualified Tuition Plans (529 Plans)
Transferring a 529 plan to your Revocable Living Trust often makes sense, but your trust
must contain specific language enabling the Trustee to manage the account. We
recommend that you contact us before naming your trust as an owner of a 529 plan.
- Life Insurance Policies and Annuities
You may want to tax-proof your major life insurance policies by creating one or more
irrevocable life insurance trusts. In any event, you will probably want some policy
proceeds paid directly to your Revocable Living Trust. Please consult with us so we can
help you determine the proper ownership and beneficiary designation for each.
If you decide to name your Revocable Living Trust as the beneficiary of a policy, here are
several points you should consider.
1. In case your retirement plan administrator fails to send you a confirmation letter, please put a copy of the change of beneficiary designation you sent to the plan administrator in the TRUST ASSETS section of your Revocable Living Trust Portfolio. When you do receive the confirmation letter, you can then substitute it for the change of beneficiary designation.
2. Your policy beneficiary designation, not your Will and Revocable Living Trust, controls the disposition of the policy benefits. Generally, you should designate your Revocable Living Trust as the beneficiary of your life insurance policies so the policy proceeds will be governed by the terms of the Revocable Living Trust. To do so, we recommend you advise your insurance agent that you want your Revocable Living Trust as the beneficiary. Your agent will make the change for you or provide you the beneficiary designation form for you to complete.
3. If you name your Revocable Living Trust as the primary beneficiary, you should name your spouse, partner, or children as the secondary beneficiary. Each insurance company will have its own preferred format for designating your Revocable Living Trust as the beneficiary.
Your insurance company should send you a letter confirming the change of beneficiaries in your insurance policy or annuity records. Please put a copy of this confirmation letter in the TRUST ASSETS section of your Revocable Living Trust Portfolio.
- Mortgage, Notes, and Other Receivables
If you have loaned money to anyone, you should assign your interest as lender to your
Revocable Living Trust by a written document and notify your debtor of the assignment.
We can prepare assignment documents for each interest for your signature. Please put
a copy of each assignment in the TRUST ASSETS section of your Revocable Living Trust
Portfolio.
- Partnership Interest
If there are no restrictions in your general partnership agreement, your interest in the
general partnership should be transferred through a written assignment of interest
signed by you and acknowledged by your partners. Transfer of an interest in a limited
partnership is accomplished in the same way as the transfer of a general partnership
interest.
- Corporate or LLC Business or Professional Interests
You should contact your corporate counsel or ask us to assist you in transferring your business interests to the Revocable Living Trust.
If your business is a corporation, you will have to cancel shares held in your name and reissue them in your name as Trustee of your Revocable Living Trust. Please put a copy of both the front and back of the new stock certificate in the TRUST ASSETS section of your Revocable Living Trust Portfolio.
If your business is a limited liability company, we will draft assignment documents to assign your interest to your Revocable Living Trust. Please put a copy of the assignment in the TRUST ASSETS section of your Revocable Living Trust Portfolio.
- Sole Proprietorship Business Interests
A sole proprietorship is a business entity owned by one person. Ownership of a sole
proprietorship can be transferred to a Revocable Living Trust with a written assignment
of interest. All items of tangible personal property should be listed individually or by
category in the assignment. Please put a copy of the assignment in the TRUST ASSETS
section of your Revocable Living Trust Portfolio.
- Oil, Gas, and Mineral Interests
The method of transferring interests in oil, minerals, and gas depends on whether you
own or lease the interests. Generally, if you own the interests, you should record a deed
that titles your interests to your Revocable Living Trust. If your interest is a lease, you
should assign your rights as a lessee to your Revocable Living Trust by a written
assignment. Please put a copy of the deed or assignment in the TRUST ASSETS section
of your Revocable Living Trust Portfolio.
- Real Property
Transferring your real property to your trust will require attention to ownership and tax
issues based on the nature of the current title to the property. Ultimately, the transfer
will require preparing, executing, and recording new deeds for each property. This
should be done through an attorney. At your request, we will assist you with this. Please
put a copy of each deed in the TRUST ASSETS section of your Revocable Living Trust
Portfolio.
- Anticipated Inheritance, Gift, or Lawsuit Judgment
If you are the beneficiary of an estate of someone who has already died, or if you are a
plaintiff in a lawsuit, you can assign your interest in the estate or lawsuit to your Revocable
Living Trust in case you are disabled or die before receiving distributions or payments.
Please put a copy of the assignment in the TRUST ASSETS section of your Revocable
Living Trust Portfolio.
Reviewing Your Estate Plan
You should review your estate plan with an attorney every two to three years because all
estate plans require on-going maintenance. In particular, a change in your family, an
increase in your net worth, or a change in the tax law could significantly affect the
effectiveness of your plan.
Conclusion:
No one likes creating an estate plan. Dealing with death is not pleasant and parceling out your assets once you are no longer there is a grim exercise for many people.
That said, one has a responsibility to make the transfer after death as easy and painless for the heirs as possible and most mature individuals take that obligation seriously. And part of that obligation is to actually perform the transfers necessary to accomplish the goals of your trust. You have to complete the job.