revocable trust

Revocable Trusts Must Be Funded to Make Estate Plan Work


Estate planning is a necessary process that everyone should go through to ensure that their assets are protected and their family is taken care of after their passing. One of the most popular estate planning tools is a revocable trust, also known as a living trust. However, simply creating a revocable trust is not enough. It must be funded to have an estate plan work. In this blog, we will explore why it is so important to fund your revocable trust.  In a recent article, “’It Ain’t Over ‘Til It’s Over’ – Use of a Funded Revocable Trust in Estate Planning” from The National Law Review the importance of funding is discussed in detailWhat is a Revocable Trust?A revocable trust is a legal document that allows you to transfer ownership of your assets into a trust. You remain in control of the assets while you are alive, and after your passing, the assets are distributed to your beneficiaries according to the terms of the trust. The trust can be modified or revoked during your lifetime, giving you flexibility and control over your assets.   Revocable trusts aren’t just about death. They can allow your loved ones to avoid a costly court-supervised guardianship if you become disabled.  See our blog on Wills vs. Trust Will vs. Revocable Trust. 

Why is Funding Important?Funding a trust means transferring ownership of your assets into the trust. This includes real estate, bank accounts, investments, and personal property. Without funding, the trust is an empty vessel that cannot do anything to protect your assets or distribute them to your beneficiaries. If you pass away without funding your trust, your assets will likely go through probate, which can be a costly and time-consuming process.Probate is the legal process of administering an estate after someone passes away. It involves proving the validity of a will, identifying and valuing assets, paying debts and taxes, and distributing the remaining assets to the beneficiaries. Probate can take months or even years to complete, and it can be expensive, with fees and court costs reducing the value of the estate.By funding your revocable trust, you can avoid probate and ensure your assets are distributed according to your wishes. Your beneficiaries can receive their inheritance much faster and with less hassle, allowing them to focus on grieving and healing rather than dealing with legal issues.Funding a revocable trust involves transferring ownership of your assets into the trust. This can be done by changing the asset’s title to the trust’s name. For example, if you own a home, you can transfer ownership from your name to the name of the trust. Bank accounts and investments can also be transferred into the trust.Working with an experienced estate planning attorney is important to ensure your trust is properly funded. Your attorney can help you identify your assets and determine the best way to transfer ownership into the trust. They can also help you update beneficiary designations and ensure your estate plan is comprehensive and up-to-date.ConclusionCreating a revocable trust is essential in estate planning, but it is not enough. The trust must be funded to have an estate plan work. By funding your trust, you can avoid probate, protect your assets, and ensure your beneficiaries receive their inheritance quickly and without hassle. Contact an experienced estate planning attorney today to learn more about funding your revocable trust and securing your legacy.

Points to Consider when Transferring Your Assets to Your Revocable Trust.

Name of Your Revocable Trust

The legal name in which assets should be held in your revocable trust is typically — Your Name Revocable Trust, Your Name as Trustee.  This is the form (i.e., title) where you should hold any properties under your trust.  You may find that a particular insurance company, bank, or other financial institution may require slightly different wording. Still, as long as your trust is identified, such slight variations should cause no concern.

Copies of Agreement

Do not be surprised if a bank, brokerage firm, or other financial institution requests a copy of your trust.  This occurs routinely.  Legally, they don’t need to see the instrument. Still, often they feel a responsibility to be sure that the trust has been properly drawn and executed and that the trustee has the represented powers.  You can usually satisfy these institutions by giving them a photocopy of your trust, or even just a copy of the pages with the trustee information, trustee powers, dates, and signatures.

Tax Identification Number

Whenever you are asked to supply a federal tax identification number for your trust, you may furnish your Social Security Number or obtain a separate tax identification number (TIN) for the trust.  Please be aware that using a separate TIN for the trust may complicate reporting.  Funding your revocable trust will not change the income tax reporting of interest, dividends, gains and losses or other income on your annual Form 1040 (U.S. Individual Income Tax Return).  It is as if your revocable trust did not exist for income tax purposes.  Therefore, no separate trust income tax return need be filed.  Regs. §§1.671-4(b) and 301.6109-1(a)(2).  However, as indicated, you must report any income the trust earns on your personal income tax return.

Beneficiary Designations for Retirement Plan Death Benefits (Pensions, Profit-Sharing Plans, Section 401(k) Plans, IRAs, Etc.)  In certain circumstances, it may make sense to name your trust as the beneficiary of your retirement plan death benefits and to allow the Trustee to administer these benefits as part of the trust funds.  This requires the completion of a proper beneficiary designation form that is available from your retirement benefit plan administrator.  You should consult with your attorney and tax advisor to make sure this is something to consider as there are tax implications that need to be addressed. Therefore, be careful before designating your trust as the beneficiary of retirement plan benefits

Life Insurance.  You may want to name your trust as the beneficiary of any life insurance policies you own on your own life unless you have been advised to transfer your life insurance policies to an irrevocable trust, a family member, or some other entity or person.  The owner often should be the beneficiary when the policy owner is someone other than the insured.  Your insurance will be available to pay the claims (e.g., debts) for which the trust is responsible.

Savings Accounts, Certificates of Deposit, Money Market Accounts, Checking Accounts, Etc. You should consider transferring significant accounts held at a bank, savings, and loan, credit union, etc., to your trust.  The wording indicated above should be used as the name for each account.  The title to a bank account is typically indicated by a signature card that records the name of your trust.

Stocks, Bonds, Street Accounts, and Other SecuritiesYou may also consider transferring your stocks, bonds or other securities or brokerage accounts to your revocable trust.  The wording indicated above should be on the certificates.If your broker holds the certificates on your investments, you need only change the name on your brokerage account to change the ownership of these assets to your trust.  If you hold the certificates yourself, one method to re-register them to your trust is to take them to the brokerage firm with whom you do business and request that they have them retitled in your trust’s name.  The certificates will be sent to the stock or bond transfer agent, who will cancel your certificate and reissue new certificates in the name of your trust.

Another method to re-register certificates is to deal directly with the transfer agent.  However, if the stock or bond certificate is lost in the mail, you will be responsible for issuing a new certificate.  Thus, we recommend that you go through your broker.

Whether you go through a broker or deal directly with the transfer agent, the back of the certificate (or an irrevocable stock power identifying the certificate) must be signed by you.  Your signature must be guaranteed by a bank, trust company, or a New York Stock Exchange firm before surrendering your certificate for re-issuance.  Before you sign the certificate or irrevocable stock power, you should fill in the name of your trust as indicated above.

Checking Accounts  If you are accustomed to using a joint checking account with your spouse for routine household expenditures, you may continue this account in its present form.  However, we may need to discuss this issue further if you are inclined to hold significant balances in your checking account or maintain several joint accounts with your spouse.

Limited Partnership Interests  You may (or may not) be able to transfer any limited partnership interest you acquire to your revocable trust.  You should contact the general partner to learn whether a particular partnership interest may be transferred to your revocable trust.

Real Estate. The wording above should be used on deeds to real property that will be transferred to your revocable trust.  You will need a record a deed, and recording fees may be charged to transfer real estate holdings to a revocable trust.  If there is a mortgage on the property, you should contact the mortgage holder in writing to ensure that the transfer of ownership to the trust will not cause the debt to become due.  Even if the debt will not become due, the lender may want to record a new mortgage (or deed of trust), with attendant fees or other charges.  You should check with the title insurance company to determine if the transfer will affect the policy and, if so, get a new policy for the trust.  Similarly, you should check on other insurance relating to the property (i.e., household or liability insurance) to see if the transfer will affect that coverage.

If you own real estate in a state other than your residence, you should usually transfer this real estate to your trust.  This will avoid the added costs of ancillary probate proceedings in the state where the real estate is located.  The expenses of ancillary probate proceedings (or recording of the probate record) usually exceed the real estate transfer costs of recording and attorneys’ fees.  However, check the transfer costs with our office, local attorney, or title company.

Any property you acquire in the future should be held in the name of your Trust as set out above. If you acquire any property through inheritance or did not take title as trustee of your Trust, remember to have a new deed prepared by a licensed attorney, transferring your interest into the Trust. Generally, deeds transferring real estate to the trustee of your Trust should be recorded in the public records in the county where the real estate is located.

Automobiles, Furniture, Furnishings, and Personal Effects Tangible personal property (e.g., motor vehicles, clothing, jewelry, and household goods) is not generally transferred to a trust.  Such assets tend to be distributed without formal probate proceedings unless they have very substantial value.

Please remember, however, that funding your trust will not change the estate tax obligations of your estate or your income tax obligations on the income of the trust.  If you have any questions or we are here to assist you in creating a comprehensive plan that works best for you and your loved ones.

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