You finally have that Living Trust you’ve known you have needed for a long time. So now what? One of the most important tasks after the creation of your trust is learning how to fund a living trust, which includes properly titling and transferring your assets into your trust. Otherwise, all your trustees and beneficiaries will have is an unfunded trust document and a huge headache.
Funding a Living Trust
“Funding” a trust is the process of transferring property from the grantor (the person creating the trust) to the trust itself. When properly funded, the trust becomes the legal owner of any assets transferred to it.
Importantly, though, any assets not formally placed in the trust remain the property of the grantor and, therefore, will still have to go through the probate process.
So, if your goal in creating a trust is to simplify your estate, funding your trust is just as important as creating it. The most well thought-out, best-drafted trust in the world won’t do a bit of good if you don’t properly fund it.
Different assets are transferred in different ways. Some assets, like bank accounts, are relatively simple to transfer, and you can probably take care of it yourself, saving some legal fees in the process.
For more complex transfers, as with real estate, you may want to have the lawyer who drafted your trust documents take care of the paperwork or refer you to an attorney who practices real estate law.
Remember, though, you should never assume that your attorney will be handling a transfer. Ultimately, the responsibility for funding the trust belongs to the grantor (that’s you), so make sure there are no misunderstandings as to the division of labor.
Fortunately, as living trusts have increased in popularity in recent years, the funding process has become easier and easier. Many banks and credit unions, for example, receive so many requests to transfer accounts to trusts that they have standardized forms prepared.
Whenever in doubt about what is needed to transfer an asset, check with your attorney, but here is a brief run-down of the process for funding your trust with certain types of assets.
To transfer a parcel of real estate into a living trust, you need to give the trust legal title to the property.
The precise process for transferring real estate varies from state to state (and sometimes from county to county), but, in general, the transfer is accomplished by executing a “quit-claim deed.”
Once signed and sealed, the quit claim deed is recorded with the land records of the county in which the property is located.
You will need to make sure the deed includes the precise legal name of the trust, and you may also want to record a trust certificate (a short document setting forth all of the trust’s essential information) along with the quit-claim deed. The clerk will probably charge a small recording fee.
In some states, you will have to pay a transfer tax when you record the deed, but many states provide exemptions for transfers to living trusts when the person making the transfer is the trustee.
If the property is subject to a mortgage or deed of trust, you may need to obtain the lender’s permission prior to recording the quit-claim deed, as many deeds of trust require lender consent for any transfer of the property before the debt is paid in full.
After the property is officially transferred, you should consider converting any homeowner’s policies into the trust’s name, also.
Mineral rights can usually be transferred by recording a transfer deed or assignment of rights, depending upon the nature of the interest and the laws of the state. Mineral rights transfers can be very complicated, so it is highly recommended that you consult with an experienced professional if you need to transfer mineral rights into a trust.
With a bank account, you will be placing title to the account in the name of the trustee in his or her capacity as trustee.
So, for a living trust created by a grantor named John Doe who is also acting as trustee, the title to a bank account would be transferred to “John Doe, as trustee of the John Doe Living Trust.”
Some banks or states may require you to list the date of the trust, so it would look like this, “John Doe, as trustee of the John Doe Living Trust, under written agreement dated May 9, 2018,” or similar language.
The most efficient way to accomplish the transfer from you as an individual to you as the trustee of your living trust is usually to visit the bank’s physical location with a copy of the trust certificate and ask the bank’s representative about that specific bank’s procedure.
You will probably need to fill out a few forms, obtain new signature cards, and change any designated beneficiaries (if applicable), but the process is usually fairly straight-forward.
A few banks may require you to close the account and open a new account in the name of the trust, though that is not always necessary.
An alternate approach worth considering is to keep the account in your own name and designate the trust as a POD (“payable on death”) beneficiary. Under this approach, the account remains titled in the grantor’s name personally until the grantor’s death and then automatically transfers to the trust.
If you have any CD’s, you will want to talk to the bank about the best timing. If you will incur early withdrawal penalties for transferring the CD to the trust immediately, it will probably be preferable to leave the CD alone until it matures and then purchase a new CD in the name of the trust.
A living trust can be used for specific bequests of valuable personal property by providing instructions for distribution in the declaration of trust. To transfer property with a title, such as a vehicle, you will need to obtain a new title in the name of the trust from the appropriate state agency, such as the DMV.
In some states, you can designate the trust as a beneficiary upon death on a vehicle title so that the vehicle automatically transfers to the trust at death.
Valuable personal property which does not have a title, such as jewelry or antiques, can be transferred to the trust by executing an “assignment of ownership,” which is a simple form documenting the transfer of the property to the trust. The assignment should clearly identify the transferred property, and be signed, dated, and (especially if the property is valuable) notarized.
It is usually not worth the trouble to fund a trust with personal property of little value. If you want to make sure any miscellaneous personal property is administered through your trust, you should execute a “pour-over will,” discussed in greater detail below.
Life Insurance Policies
Life insurance policies can be handled in one of two ways:
- You can name a primary life insurance beneficiary, contingent beneficiary and even a tertiary beneficiary of your life insurance death benefit proceeds. The individual or organization you name will receive the policy proceeds, in which case the trust need not be involved.
- Or, you can name the trust as the beneficiary of the policy. This can usually be accomplished with a call to the insurance agent or the life insurance company. You will need to execute change of beneficiary and/or consent forms which you should be able to obtain from your agent or insurance company. Changes as to beneficiaries are not effective until received and acknowledged by the companies.
The advantage of the latter approach is that the proceeds will be paid into the trust, so the trustee will be able to handle distribution according to the terms set forth in the declaration of trust.
The downside is that, if your estate is large enough to qualify for estate taxes, the value of the policy proceeds could increase the estate taxes owed.
Once again, if you decide to name the trust as beneficiary, you will need to obtain change of beneficiary forms from your insurance company, execute the forms, and return them to the insurer.
The reason is that, because a trust is not a natural person, it does not qualify for tax deferment. So, the trust would have to pay taxes on the account’s gains currently.
Instead, you can either name your spouse or another heir as the beneficiary of the retirement plan, or you can make the account payable to the trust upon your passing.
If you designate a beneficiary, he or she may be able to roll-over the plan into his or her own plan when you die.
Keep in mind, though, that the named beneficiary will have control over the inherited plan once it transfers. If you name the trust as beneficiary at your death, the plan will lose the tax deferment treatment upon the transfer, but the trustee will be able to distribute the plan proceeds according to the terms set out in your living trust.
The process for transferring stocks will depend upon how you own them. If they are owned through an account with a brokerage firm, you should only need to change the ownership of the brokerage account.
To do that, you will need to contact the brokerage firm for the firm’s procedure for account ownership changes. It is usually fairly simple, and you may be able to get instructions and the forms you need on the brokerage firm’s website or toll free help line.
The transfer will be a little more complicated if you need to change the title to share certificates. To make the change, you should ask your broker to amend the certificates for you. The broker will probably charge a small fee and ask that you provide sufficient documentation showing that the trust has been validly declared and that the trustee has authority to transfer stocks.
Promissory Notes and Other Debts Payable
To transfer the right to receive payments under a promissory note or other debt, you will need to execute an “assignment of rights.” After the assignment is executed, the legal right to collect the monies owed under the promissory note belongs to the trust.
If the rights are not assigned, and the note is not paid prior to your death, the right to receive payment of the outstanding debt will become an asset of your estate, so the executor (rather than the trustee) will be responsible for recovering the debt.
You might not want to transfer all your property into your trust right away. But, if you have decided for all of your property to be administered through your trust, you need to make sure everything makes its way into the trust eventually.
A good way of addressing assets intentionally or inadvertently left out of the trust during your life is through a “pour-over will.”
A pour-over will is a relatively simple will that, upon the death of the grantor, transfers to the trust any assets left out of the trust during the grantor’s life, i.e. assets “pour over” into your Living Trust, to be treated as set forth in the terms of your trust.
Assets subject to a pour-over will might still need to go through probate (depending upon the value), but the advantage is that any assets transferred by the pour-over will are administered under the terms of the trust.
So, if you are planning to have your estate administered primarily through the trust, a pour-over will is a good idea to grab any items that you may have overlooked or that you failed to properly title in the name of your trust.