FEBRUARY 2022 - Is Your Trust Funded?
We have seen a significant increase in estate planning over the last few years. Many of our clients have choose to create a revocable living trust instead of relying on a will or joint ownership to pass assets to their family. They like that with a revocable trust, their assets can pass to their loved ones without having to go through probate, which in turn saves time and money.
A living trust can also allow you to provide for your spouse without disinheriting your children, which can be important in second marriages. And it can protect inheritances for children and grandchildren from the courts, creditors, spouses, divorce proceedings, and irresponsible spending.
Still, many people make a big mistake that sends their assets right into the court system: THEY DON’T FUND THEIR TRUSTS.
What do you mean I have to “fund” my trust?
Funding your trust is the process of transferring your assets from yourself to your trust. To do this, you must physically change the titles of your assets from your individual name (or joint names, if married) to the name of your trust. You will also need to remember to change most beneficiary designations to your trust. You have to make sure this is done with every single asset and every single account that you have. A blanket assignment that says transfer all my assets to my trust does not work. Therefore, after signing your estate plan, you will have to do some work to actually get the assets in the trust.
Who has control over the assets in my trust?
The trustee you name will control the assets in your trust. Most likely, you have named yourself as trustee, so you will still have complete control. One of the key benefits of a revocable living trust is that you can continue to buy and sell assets just as you do now. You can also remove assets from your living trust should you ever decide to do so.
Why is it so important to fund my trust?
If you have signed your living trust document but haven’t changed titles and beneficiary designations, you will not avoid probate. The trustee of your trust only has access and control over assets that are titled in the name of the trust. You may have a great trust, but until you fund it (transfer your assets to it by changing titles), it doesn’t control anything. It is an empty bowl and not serving the purpose it was created for. If your goal in having a living trust is to avoid probate at death and court intervention at incapacity, then you must fund it now, while you are able to do so.
What happens if I forget to transfer an asset to my trust?
Along with your trust, you will have a “pour over will” that acts like a safety net. When you die, the will “catches” any forgotten asset and pours it into your trust. The asset will have to go through probate first, so this is not something we want to rely on. However, it is in place to ensure that if you forget to put an asset in you trust, it will be distributed according to the instructions in your trust.
Why doesn’t my attorney fund my trust?
You are ultimately responsible for making sure all of your assets are transferred to your trust. Typically, your attorney will transfer any real estate you own to your trust and then provide you with instructions on how to transfer your other assets. Understand that your attorney does not have the authority to make changes to your accounts. Ideally, your attorney will review each asset with you, explain the procedure, and give you instructions on transferring each asset.
How difficult is it to fund my trust?
It’s not difficult, but it will take some time. Because living trusts are now so widely used, you should be met with little or no resistance when transferring your assets. Most can be handled by mail or telephone.
Some institutions will want to see proof that your trust exists. To satisfy them, your attorney will prepare what is often called a certificate of trust. This is a shortened version of your trust that verifies your trust’s existence, explains the powers given to the trustee and identifies the trustees, but it does not reveal any information about your assets, your beneficiaries, or their inheritances.
While the process isn’t difficult, it’s easy to get sidetracked or procrastinate. Just make funding your trust a priority and keep going until you’re finished. Make a list of your assets, their values and locations, and work your way down. Remember why you are doing this, and look forward to the peace of mind you’ll have when the funding of your trust is complete.
Which assets should I put in my trust?
The general idea is that all of your assets should be in your trust. However, as we’ll explain, there are a few assets you may not want in, or that cannot be put into, your trust. Also, your attorney may have a valid reason for leaving a certain asset out of your trust.
Generally, assets you want in your trust include real estate, bank/saving accounts, investments, business interests and notes payable to you. You will also want to change most beneficiary designations to your trust so those assets will flow into your trust and be part of your overall plan. IRAs, retirement plans and other exceptions are addressed later.
Will putting real estate in my trust cause any inconveniences?
In most cases, you will notice little difference. Because your living trust is revocable, transferring real estate to your trust should not disturb your current mortgage in any way. Even if the mortgage contains a “due on sale or transfer” clause, retitling the property in the name of your trust should not activate the clause. There should be no effect on your property taxes because the transfer does not cause your property to be reappraised. Also, having your home in your trust will have no effect on your being able to use the capital gains tax exemption when you sell it.
Also, having your trust as the owner on your homeowner, liability and title insurance may make it easier for a successor trustee to conduct business for you. Check with your agent.
What about out-of-state property?
If you own property in another state, transferring it to your living trust will prevent a conservatorship and/or probate in that state. Your attorney can contact a title company or an attorney in that state to handle the transfer for you.
Should I put my life insurance in my trust?
That depends on the size of your estate. Federal estate taxes must be paid if the net value of your estate when you die is more than the amount exempt at that time. Your taxable estate includes benefits from life insurance policies you can borrow against, assign or cancel, or for which you can revoke an assignment, or name or change a beneficiary.
If your estate will not have to pay estate taxes, naming your living trust as owner and beneficiary of the policies will give your trustee maximum control over them and the proceeds.
If your estate will be subject to estate taxes, it would be better to set up an irrevocable life insurance trust and have it own the policies for you. This will remove the value of the insurance from your estate, reduce estate taxes and let you leave more to your loved ones.
There are some restrictions on transferring existing policies to an irrevocable life insurance trust. If you die within three years of the transfer date, the IRS will consider the transfer invalid and the insurance will be back in your estate. There may also be a gift tax. These restrictions, however, do not apply to new policies purchased by the trustee of this trust. If you have a sizeable estate, your attorney will be able to advise you on this and other ways to reduce estate taxes.
Should my car be transferred to my trust?
Unless the car is valuable and substantially increases your estate, you will probably not want it in your trust. The reason is if you are at fault in an auto accident and the injured party sees that your car is owned by a trust, he or she may think “deep pockets” and be more likely to sue you.
If no other assets need to be probated, the Secretary of State’s office can transfer title of the deceased person’s motor vehicles. Currently, the total value of the vehicles must be $60,000 or less in order for the Secretary of State to transfer title. Title is transferred to the surviving spouse, or if none, to an heir. You must provide a death certificate, the vehicle titles, and fill out a simple form.
What about my IRA and other tax-deferred plans?
Usually we recommend that you do not change the ownership of any IRA’s or tax-deferred plans to your living trust. This is because if you name an individual as the beneficiary there is an option for them to “roll over” your tax-deferred account into his/her own IRA and name a new beneficiary. This will provide the option of many more years of tax-deferred growth and allow your loved ones to pay tax on the money over several years.
Of course, any time you name an individual as beneficiary, after you die, the beneficiary can do whatever he or she wants with this money, including cashing out the account and destroying your carefully made plans for long-term, tax-deferred growth. The money could also be available to creditors, spouses and ex-spouses, and there is the risk of court interference at incapacity.
However, while not the best option for tax planning, naming a trust as beneficiary can give you more control because the distributions will not be paid to an individual, but into a trust that contains your written instructions stating who will receive this money and when. Therefore, this may be the best option for people who are thinking of naming a minor, person with disabilities, or someone that does not always make good financial decisions.
Because there are many options and often a lot of money at risk, be sure to get expert advice.
What about personal property that doesn’t have a title?
Personal property (artwork, clothing, jewelry, cameras, sporting equipment, books and other household goods) typically does not have a formal title. Within your estate plan, you will have an assignment to transfer these items to your trust, so there is nothing you will need to do further than that.
What if I buy new assets after my trust is funded?
Find out if you can take the title initially as trustee of your trust. If not, transfer the title to your trust right away. If you’re not sure how to transfer it, contact your attorney for instructions.
As you can see, by properly funding your trust, you will ensure that your legacy will be passed to your loved ones without the hassle of probate. The attorneys at SSR Law Office are trusted estate planning attorneys and will work closely with you to help you create and properly fund a complete and customized estate plan that protects you and your loved ones.
Although these two documents are commonly associated with seniors, they are two documents that everyone should have, including your 18 year old child. What most people don’t realize is that once your child turns 18, you no longer have the authority to make decisions for them, even if you are paying their tuition, they are on your health insurance plan, or you claim them as dependents on your tax return. You still cannot make these important decisions for them because they are no longer a minor.
Here is something that many parents do not anticipate: Your child goes away to college and due to the increased cost and skyrocketing interest rates on student loans, you decide to help them pay part or all of their tuition. Your child begins to enjoy their new found freedoms and their grades begin to slip. When end of semester comes around, their report cards go directly to them. You as the parent, even though you are paying tuition, have no right to get a copy of the report card, receive any information from the school, or speak to the school on their behalf. This is why most parents, especially if they are paying tuition, make sure their child has a Durable Power of Attorney in place so that they can confirm that the child is keeping up on their grades.
Although their grades are very important, the real risk is if your child is injured and taken to the hospital, or has some other type of medical emergency. As a parent myself, no one ever wants to think of their children being injured or sick, but it is important to plan for these things in case you are faced with this situation.
Think of this scenario, your child is rushed by ambulance to the hospital. Regardless of whether you are thirty minutes from your child or three hours from your child, you will want to know details about the accident, their arrival to the hospital, current condition, etc. Without a Patient Advocate in place, they will not release any of this information to you due to the Privacy Rule of the Health Insurance Portability and Accountability Act, or HIPAA.
Although these are difficult topics to talk about, many of our clients have benefited from these documents when trying to help their young adult children in many situations. Without these documents in place, it can be more difficult for parents to help their sons and daughters. It is like insurance: you hope you never have to use it, but it is there if you need it.
The attorneys at SSR Law Office are trusted Estate Planning attorneys and can help ensure that your young adult children have the right documents in place. Call us today to schedule a consultation to discuss your family’s estate planning
HOW CAN WE HELP?
Contact us today at SSR Law Offices, at (586) 239-0871, if you think any of the above situations involve you or family member and you would like an estate planning review. The attorneys at SSR Law Office work very hard to ensure your estate plan fits your needs and is then fully funded to ensure you are maximizing the benefits of your trust.