Is Your Trust Funded Properly?
Article by Lindsay Cummings
Too often individuals and couples have a Trust prepared assuming that the Trust itself is the key to avoiding probate. It is a common occurrence to find that an individual or couples Trust is not funded or it is not funded properly. If your Trust is not funded you will not avoid probate. Is your Trust funded properly? Did the attorney who prepared your Trust discuss funding or assist with the transfer of assets into your Trust? If you have a Trust you should review the title documents to all of your assets with your attorney to confirm that your Trust is the owner of your assets or the assets are set to transfer outside of Trust properly in order to avoid probate.
Below are some common assets and tips for funding your Trust.
- Insurance. Life insurance proceeds are usually income tax free and can be paid to your Trust immediately upon your death without incurring any income tax consequences. If the actual policy is owned by your Trust, you will need to proceed with some caution so the insured Trustee is not found to have an ownership in the Trust owned policy. It is important to obtain beneficiary designation forms directly from the life insurance company.
- IRAs. If you are married, your surviving spouse may continue to be designated as the primary beneficiary due to some beneficial income tax rules. Individual children may be the contingent beneficiaries, provided they do not require management of the funds. The Successor Trustee could be identified as a possible contingent beneficiary in the event your children are minors, or have special needs. If the IRA is paid directly to your Trust, and you have children, then your oldest child’s life expectancy will determine the pay out period for the retirement plan or IRA.
- Stock/Other Investments. You are not required to provide a copy of the entire text of your Trust to your bank or financial advisor. Rather you should provide banks and brokers with the Certificate of Trust. However, if you hold an actual share certificate then each share certificate will need to be surrendered to the company and then re-issued in the Trustee’s name to ensure ownership by the Trust.
- Tangible Personal Property. When a Trust is executed, the estate plan will include a Declaration of Trust Ownership or a Bill of Sale. These documents are used to transfer title to small tangible personal property assets. Typically, a list is also attached to your Trust for identifying specific items or gifts of tangible personal property that you wish to have passed to certain individuals upon your death.
- Vehicles. Vehicles such as motor homes and boats, which use certificates of title, are recommended to be re‑registered in the name of the Initial Trustee so the Trust is the named owner. Your personal vehicle does not need to be retitled, because a special probate statute allows a personal vehicle to be transferred upon your death to your surviving spouse or close family member at the Secretary of State office.
- Bank Accounts. Another common question is whether savings or checking accounts should be in the name of the Trust. This becomes more of a personal choice. If your probate estate exceeds roughly $20,000 at the time of your death, then your estate will be ineligible for an expedited probate procedure. Therefore, if you choose to keep your accounts in your name, rather than in the name of the Trust, then it is advisable to transfer money to an account in the name of the Trust so the balance does not exceed the $20,000 amount in order to remain eligible for the expedited probate procedure. If you have a joint account then the monies in the account will pass to the survivor. It is deemed to be property held as joint tenants.
- Real Property. As a general rule, real estate owned by you should be held in the name of your Trust. If real estate passes outside of the Trust and is probated it is much more expensive and time consuming. Funding real estate to your Trust requires recording a deed with the register of deeds. We recommend using a Warranty Deed to preserve any title insurance coverage. A Property Transfer Affidavit will also need to be filed in order to avoid a tax uncapping issue.
- Business Interests. Before transferring business interests, the controlling agreement, such as the operating agreement, partnership agreement, stock purchase, and voting arrangements should be reviewed by your attorney to verify whether the business permits such transfers to a Trust. If it is possible under the controlling agreements, it is advisable to assign your interests or LLC units into your Trust.