Yes! The preparation of Revocable Trust documents is only the first step in eliminating probate and minimizing estate tax. Once drafted, trusts must be “funded” with the Grantor’s assets.

The process of funding assets into trust can be somewhat laborious, but it is essential to achieving the full benefit of Revocable Trusts; that being avoidance of probate and minimization of estate tax.

The method of transferring assets into trust will depend on the nature of the asset being transferred. For some assets, like stocks, bonds and real estate, the method of funding involves a change of ownership.

Other assets, like qualified retirement plans and IRAs, do not permit a change of ownership during the lifetime of the Grantor, and thus must be transferred into trust by means of a change of beneficiary.

Whether by change of ownership or change of beneficiary, funding involves either a current or future change of ownership to the Revocable Living Trust. The name of the Grantor, the Trustee(s), and the date the trust are needed to identify the Trust to which assets will be transferred.

A typical trust name might be “Harry Barnes and Wendy Barnes (or Successor Trustee) as Trustees for the Harry Barnes Revocable Trust dated September 1, 1999, as amended.” However, in light of the space limitations on ownership and beneficiary forms, it may be necessary to abbreviate the trust name down to its most important elements.

The following name can be used in place of the full trust name described above: “Harry Barnes Trust dated 9/1/99.”

For purposes of funding, assets can be broken into several broad categories:

REAL ESTATE

Transferring ownership of real estate into trust is critical since real estate often comprises a significant portion of an individual’s estate.

A: “Quit Claim Deed” is used to transfer real estate into trust.

In a Quit Claim Deed, the Grantor and the Grantor’s spouse, if married, transfer their entire interest in the real estate described in the deed to the “Grantee” named in the deed. For estate planning purposes, the Grantee will either be the husband’s Revocable Living Trust or the wife’s Revocable Living Trust. In some cases, a one-half (1/2) interest will be tranferred to each spouse’s trust. The Quit Claim Deed on the next page is a sample of real estate owned 1/2 by each spouse’s trust.

Once prepared, the Quit Claim Deed can either be “recorded” with the county, or simply held by the attorney or the client. Whether or not the Quit Claim Deed is recorded will depend on a number of factors including the age of the Grantor, how long the property is intended to be held, and the profession of the Grantor. Deeds of home owners who intend to live in their home indefinitely should be recorded. Owners who intend to move or refinance may wish to leave their deed unrecorded. Unrecorded deeds are not a matter of public record and thus do not complicate the sale or refinancing process. Unrecorded deeds can be recorded at a later date, even after the death of the Grantor.

Married couples with significant liability exposure may choose to not record their Quit Claim Deed. Real estate owned by a husband and wife is “entireties” property (also know as a “tenancy by the entireties”), and exempt from the individual creditors of either spouse. Titling real estate in one spouse’s trust could expose the real estate to the claims of that spouse’s creditors.

The fact that the real estate is subject to a mortgage is of no concern, since a later-filed deed does not affect the mortgage. Transfers to trust are exempt from state and local transfer taxes, and are not considered a taxable transfer for homestead tax assessment purposes. A principal residence owned in trust still qualifies for the $250,000/$500,000 forgiveness provisions of Federal law. Note, however, that for Medicaid eligibility purposes, a principal residence owned by a Revocable Trust is not eligible for the homestead exemption.
(See Q14).

PUBLICLY TRADED SECURITIES

Ownership of publicly traded securities such as stocks, bonds and mutual funds whether held in the client’s name or in a brokerage account should be transferred into trust. When making such transfers, the transfer agent, bank or brokerage house will ask for a copy of the trust. Clients are often reluctant to comply with this request feeling that such a request is both burdensome and an invasion of their privacy. Fortunately, a “Certification of Trust Authority and Existence” may be presented to the financial institution in lieu of the actual trust document. A trust Certification is a summary of the essential terms of the Revocable Living Trust document. A Certification conveys the essential information needed by the financial institution, while preserving the privacy of the Grantor.

SOCIAL SECURITY NUMBER

Revocable Living Trusts are treated as “grantor trusts,” and are thus not subject to tax during the lifetime of the Grantor. All income and loss from trust assets are reported on the Grantor’s personal income tax return (Form 1040 and MI 1040). Therefore, the Grantor’s social security number should be used as the tax identification number on all trust accounts.

LIFE INSURANCE

Life insurance should name the owner/insured’s Revocable Living Trust as beneficiary. This can be somewhat difficult to explain to married couples who instinctively believe that the surviving spouse is the proper beneficiary. Except in the case of transfers of life insurance to an Irrevocable Trust, it is not necessary to change the owner of the policy, simply changing the beneficiary will achieve the objective of funding the deceased owner/insured’s Revocable Trust. A phone call from the owner of the policy to the insurance company requesting a “change of beneficiary form” will produce a change of beneficiary form in the mailbox of the owner/insured within three days of the call. For security reasons, insurance companies will not accept policy requests from anyone other than the owner. Finally, it is important to immediately return beneficiary designation forms since most companies will not honor beneficiary designation forms received by them after the death of the insured.

NON-PUBLICLY HELD CORPORATIONS, PARTNERSHIPS AND LLCs

Closely held businesses, whether or not in corporate form, often comprise a significant portion of the value of a decedent’s estate. Potential buyers after the death of the decedent need assurance that successors in interest have the legal authority to sell the business asset. To avoid complications and delays after the death of the decedent, ownership of closely held businesses should be funded into trust during the lifetime of the owner. Corporate ownership is transferred by canceling existing stock certificates and reissuing them in the name of the shareholder’s Revocable Trust. The operating agreements of Partnerships and LLCs must be amended to reflect the change.

QUALIFIED RETIREMENT PLANS, SEPS, IRAs, 403(b)s

As a matter of Federal and state tax law, the named owner (sometimes referred to as “participant”) of qualified retirement plans and other tax-preferred retirement savings accounts cannot be changed without causing the entire account to become immediately taxable to the owner. Artfully drafted beneficiary designation forms are necessary to properly fund these assets into trust while avoiding current income taxation. A careful reading of Q17 is important to fully understand the interplay between the income and estate tax consequences of various beneficiary designations. As a rule of thumb, retirement assets require a two-part designation: The participant’s spouse should be designated as the primary beneficiary, and the Revocable Trust of the participant named as the contingent beneficiary. A two-part beneficiary designation allows the greatest flexibility when negotiating the complex and perilous income and estate tax rules that apply to retirement plan assets.

PERSONAL PROPERTY

No action is required to fund personal property into trust. Being that personal property (e.g., furniture, jewelry, art work and other household items) cannot be retitled (there’s no deed for a table or chair!), such property cannot be transferred into trust. Instead, the disposition of personal property is governed by the decedent’s Last Will and Testament. Most Wills permit the use of a “separate writing”, disposing of items of personal property (See Q4). Motor vehicles are specifically exempted from probate, and therefore do not need to be retitled into the name of the Revocable Trust. Consequently, automobiles and other motor vehicles should not be transferred into trust. For liability purposes, automobiles, recreation vehicles, and other motor vehicles should be owned by the primary user of the vehicle.

OFTEN MISSED ITEMS

From our experience, there are three categories of often missed assets: savings bonds, stock certificates and undeveloped real estate lots. Savings bonds are often filed away and forgotten, as are stock certificates issued in the owner’s name. Undeveloped lots are often a bad memory with little value, and therefore repressed from consciousness. Unfortunately, any one of these overlooked assets may require a probate proceeding to transfer title. For this reason, both the attorney and client must be diligent in identifying all assets of the estate.

Unfunded assets pass through probate. An unfunded trust is also much less likely to preserve the unified credit of the Grantor at the time of death. It is the responsibility of the estate planning attorney to emphasize the importance of trust funding. The division of responsibility for funding among the attorney, the financial advisor and the client should be well established. Intense participation by the client in trust funding is important for two reasons:

1. It limits attorney fees. 2. Client participation increases the likelihood that the trust(s) will continue to be properly funded long after the trust documents have been prepared.