Funding and Administering your Revocable Living Trust

[For definitions of the legal terms used here, please visit our Glossary page]

INTRODUCTION

It is critical to manage your estate carefully now that you have created a sophisticated, modern estate plan.  If you simply file the documents and forget about them, they will not provide the benefits which you have sought:  savings from avoiding death taxes, probate and administrative fees; privacy of your estate administration; and a shorter wait for your beneficiaries to whom you have left your hard-won assets, to name just a few of the more prominent benefits of your estate plan.

In this memorandum, I will lay out for you the steps which you should take in funding and administering your Revocable Living Trust (RLT).  Please do not hesitate to contact me if you have any questions.

YOUR REVOCABLE LIVING TRUST

The Importance of Funding Your Trust.  "Funding" your RLT, that is, transferring title to your assets from (1) yourself as an individual to (2) yourself as Trustee, is crucial. If you do not fund your Trust, you will lose most of the benefits of your Trust, listed above.

Remember, what you own individually at death passes through probate, but what you own as Trustee of your Trust avoids probate.  Therefore, the less property you place in your trust, the more will have to "pour over" from your estate through your pour-over wills, through probate, into your trust. That property will be subject to the all delays, costs, and public inspection of probate assets. Further, if you do not effectuate the change in jointly owned assets by funding your trust, your assets might be subject to the federal and state estate tax in the estate of the last owner to die.

It is important to understand the process of funding your Trust. Sometimes, funding your Trust is accomplished by changing a beneficiary designation. For example, a bank account should be conveyed to your Trust by adding the Trustee as a joint owner. On the other hand, a piece of real estate must be deeded to the Trust, and the deed must be recorded, either at the time of funding the Trust or at your death, as you decide (discussed below).

The Process of Funding Your Trust.  The discussion which follows covers various methods of funding your Trust with assets which the average person commonly holds, pointing out the advantages and disadvantages of each. The method of transfer varies according to the asset. In the case of stocks, bonds, mutual funds, life insurance, and bank accounts, you, your banker, stockbroker or insurance agent can usually handle the transfer for you or your Trustee. 

Of course, if you have any questions, call me.  It would be my privilege to assist you in any way necessary, and to review all beneficiary designation forms, signature cards, and other such documents.

You will transfer your trust assets from yourself as individual to yourself as Trustee. Any variations from the norm will be noted in the instructions below, but the usual form is a transfer from you to:

"  Trustee of 'THE [name of trust] TRUST,' dated [date of signing]  ."

Again, if you have any questions about what to transfer to your trust or how to transfer it, please call.

1. Securities to which you hold the stock certificates directly:  In your case, where the current active Trustees are individuals (i.e. where there is no corporate trustee involved), the most common method of transferring registered securities is to place them in the name of the Trustee(s) as Trustee(s), as above.

Although it is not always required, it may be necessary to provide the corporation with a copy of the Certificate of Trust Existence and Authority (COA) and a copy of your Trust. The COA recites the fact of trust existence and the identity and powers of the trustee.

Any securities which you purchase in the future should be purchased in the name of the Trust, by you as Trustee(s).  This will provide clear evidence of the Trust's ownership of your assets.

2. Securities or mutual funds which you purchased through a broker:  You should contact your broker, and ask him to set up a new account in the name of the Trust, transfer all of the assets in your individual names into the new account, and close the old account(s).  Your broker will probably want a copy of the COA, and maybe of the Trust, and might want a signature guarantee.  This transaction should be at no cost to you, since you are really doing nothing more than changing the name on the account.  Again, any securities purchased in the future should be purchased through the Trust's account.

3. Uncertificated securities: You should notify the owner of the corporation, and have the shares transferred to the Trust on the books of the corporation.

4. Real Estate: If we determine that it is necessary or advisable to transfer real property into your trust, I will prepare a deed for you to effectuate the transfer.  It is my opinion that there is no need to record the deed to the Trustee prior to your death, since it can be recorded at any time.  Recording the deed simply protects the purchaser (you, as Trustee) from a resale by the seller (you, as individual).  As should be clear, there is no need for such protection as long as you are serving in both capacities.

It follows from this discussion that if you wish to sell your home, you need not disclose the provisions of the Trust.  You may simply nullify the former deed (by destroying it) and proceed with sale of the home.  Upon purchase of a new home, it should be deeded into your Trust.

Still, not recording your deed now adds to the effort required by your successor Trustee, and leaves until after your death the possibility that there might be some defect in the deed.  For these reasons, some of my clients choose to record their deed immediately.  If you choose to do so, I can advise and assist you in this.

The transfer of residential real property will not cause a "due on sale" provision to accelerate the mortgage, under federal regulations, as long as you notify your lender that you have made the transfer to your own, self-trusteed trust.  I can provide you with a "Mortgage Transfer Letter" directed to the mortgage holder.  If they have any questions, please have them call me.  Commercial real property under mortgage presents other problems, since the federal law only applies to residential property.  I will need to work with the mortgage holder to effectuate the transfer.

Remember:  After you buy the new house, be sure to transfer the new house into the trust.  If you fail to do so, it must go through the probate process.  Real estate is some of the worst property to put through probate, since it does not generate value with which to pay the fees and costs of probate without selling or mortgaging it.  If you forget to put your new house into your trust, your beneficiaries might lose it for that reason alone.  I will be happy to write a new deed into your trust for you at a nominal cost.

Out-of-state realty may pose a special problem, since in some cases your successor Trustee from your state of residence may not be empowered to act in the state in which the real estate is located. If out-of-state realty is acquired after the creation of the Trust, you should have me consult with an out-of-state attorney regarding the method to be used in taking title to the property.

Any interest in real estate that is less than absolute ownership, such as a land contract or a lessee's interest, may also be assigned to the Trust. I will need to review the terms of the land contract, lease or other relevant document to assure that assignment is permitted. Again, you should consult with me as to the proper method to transfer this interest.

5. Bank Accounts and Safe Deposit Boxes (including savings accounts and certificates of deposit.):  You should add the name of your Trustee as joint and survivor beneficiary with you as an individual(s), adding the trustee designation to your existing signature card.  Your bank might be satisfied with just your name, or might want the name(s) and signature(s) of successor Trustee(s).

This registration should be on all documents from the bank to indicate that the Trustee is the owner on your death or your incompetence. The signature card may provide that, if there is more than one Trustee, one signature is sufficient so that any one Trustee can transact business in the absence of the other(s).

Please have the bank manager call me if there is any problem.  Many bank personnel are ignorant of the proper use of an RLT, and do not understand how to fund it.  They might even try to dissuade you from using or funding your Trust.  I have always been able to rectify the situation, so have them call me.

6. Life Insurance:  If you own an insurance policy on which you are the insured, or if the proceeds of the policy are payable to you, your estate, or your executor, the insurance proceeds will be included in your gross estate for federal estate tax purposes.  This is a fact of which many of my clients are unaware, having been assured by their life insurance agent that life insurance is "tax free."  To be more precise, under most circumstances it is income tax free to the recipient, but it can (and often does) generate estate tax, and could also generate income and gift taxes.

Transferring ownership of your policies to an Irrevocable Life Insurance Trust will eliminate this problem, as long as the policies do not pay to you or your estate or executor and as long as you survive for three years after the transfer. I will be glad to discuss this issue with you to determine whether you are possibly subject to Federal Estate Tax, and whether this transfer is advisable.  The answer to this question, as to so many others, depends on your unique situation.

In general, life insurance policies should be owned by the trust, and payable to that trust.  This is not always the case, however, and you should discuss this with me in detail before you make transfers.

7. Retirement Plans:  Your surviving Spouse, if any, should be the first beneficiary of your pension plan and any other retirement plans, such as IRAs, Keoghs, 401(k)s, SEPs, Corporate Pension or Profit-Sharing Plans, or ESOPs.  We will discuss the proper designation if you do not have a spouse and for the successor beneficiary, since those designations depend on many factors.

8. Series E or H bonds:  If you have U.S. Savings Bonds, they can be transferred into the trust using a form which is available in our office, or at any bank.  I would be pleased to provide it to you.

9. Automobiles:  There is a division of authority as to the advisability of transferring automobiles to your trust.  Further, since the desk staff at the MVA is, unfortunately, totally ignorant about the nature of the transfer, they will often insist on the payment of taxes that are not legally due.  Therefore, most of my clients choose to leave their cars out of the trust.

Protecting Trust Assets.  Once the Trust document has been signed and assets have been transferred to the Trust, the Trust is fully operative as to those assets. At this point, there are certain basic steps which the Trustee should take.

A. Insurance Coverage:  If you currently have insurance coverage (i.e. homeowner's insurance) on the assets which you transfer to the Trust, you should continue the coverage. The insurance policy should be revised to add the Trustee(s) as named insured(s) on the policy. This can usually be done at no cost.

B. Keep Assets Separate:  Assets such as stocks and bonds which have been transferred to the Trust should be placed in a safe deposit box separate from your personal assets. If the safe deposit box holds only Trust assets and is in the name of the Trustee, there should be no problem in identifying bearer bonds or unregistered securities as Trust assets. The danger comes from commingling Trust and non-Trust assets, with resultant confusion as to your intent if there is no other means of distinguishing the assets, such as reregistration.

Administering Your Trust.  As Trustee, you are the legal owner of the Trust assets. At law, however, the Trust property belongs beneficially to the Trust itself. That is to say, the Trustees hold title to the Trust assets, but the Trust gains all the benefit from your actions. Since the Trust exists for the benefit of its beneficiaries, you must account to them.

Since you are the Settlor, the Trustee, and the only Beneficiary with an interest which is certain to be vested in you, and because the Trust is fully revocable during the life of either of you, you are in effect accounting to yourself for the stewardship of your own assets, not different from when you owned the assets outright. And since you can revoke the Trust at any time, you are the only beneficiary that legally matters. Therefore, you have a legal duty to see only to your own best interests.

The interests of the other Revocable Living Trust beneficiaries are "contingent," that is, the interests of the other beneficiaries depend on the fact that you choose not to revoke their interest. Until you die and their interests become irrevocable, you have no legal duty as Trustee to any beneficiaries of the Trust besides yourself.

The theoretical split ownership between Trustee and Beneficiary as described above is a protection for you and your beneficiaries when you are not able to administer the trust. For example, if you become incompetent, your interests will be protected by the laws governing Trustees ("fiduciary" laws) to ensure that the successor Trustee does not abuse his position of trust and appropriate assets for his own benefit.

A. Record Keeping:  Even where the Settlor is the Trustee of a Trust for his or her own benefit, a Trust cannot be set up and funded and then forgotten. The Trustee has a responsibility to keep accurate records concerning the Trust assets. This will also make the Successor Trustee's job much easier. 

You should not feel burdened by accounting responsibilities when you are not comfortable in that role. Basically, if you do your own accounting now, you should be able to do your Trust accounting, since the record keeping is basically the same.  If, on the other hand, you currently use the services of an accountant or other financial professional, you should consider doing so for your Trust.  You might also choose a bank or other professional to perform this function. This entity might be named as the Successor Trustee and could also serve as custodian of the Trust assets while you are still acting as Trustee. This alternative allows for continuity in trust administration.

B. Additions and Deletions of Assets in the Trust:  Again, be sure to take title to additional assets in the name of the trust or the appropriate share of the trust.

C. Taxation of Your Trust: Since your Trust can be revoked at any time, it is indistinguishable from you.  It does not have a separate tax identification number, but uses your Social Security Number.  You report income and losses of the Trust on your Form 1040.

When you pass away, the Trust becomes an irrevocable trust.  At that time, the now-irrevocable trust becomes a separate taxable entity, and must have a Taxpayer Identification Number (TIN).  I can assist your successor Trustee in applying for the tax I.D. number for the Trust.  At that time, the Credit Shelter Trust would file its own tax returns, Form 1041.  Please call me when it is time to make these changes, and I will assist you.

RLT Trustees.  I suggest that you consider appointing a successor Trustee to assist in the administration of Trust assets as a concurrent Trustee. This allows the successor Trustee to become familiar with the Trust assets before he or she is called upon to manage them alone at your death.

SUMMARY

A sophisticated estate plan has been created especially for you. A great deal of thought and effort was devoted to the creation and funding of your Trust. 

If at this point you simply forget about the Plan, many of the benefits which it would otherwise provide you may be lost. If you familiarize yourself with the requirements and guidelines set forth above, you should be able to maintain the full effectiveness of the Plan with minimum effort. However, if questions arise from time to time which you are unable to answer, you should not hesitate to contact me.

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