Funding a Revocable Living Trust
A revocable living trust is a common and important estate planning tool that allows a person to consolidate ownership of their assets during their lifetime and ensure that they are distributed efficiently per their wishes upon death outside of the probate court system. The person who sets up the trust is known as the “Grantor” and typically continues to manage the assets during his or her lifetime as the “Trustee.” Upon the death of the Grantor, a Successor Trustee, chosen in advance by the Grantor, will manage and administer the trust for the benefit of the named beneficiaries.
When setting up a trust, it’s important to understand that assets are not automatically placed in the trust simply by listing them on a schedule or attachment; rather, after executing the trust, the Grantor must transfer or retitle their assets through a process known as “funding.” At the time of the grantor’s death, if the trust was fully funded and the Grantor successfully transferred all of his or her assets to the Trust, probate will be avoided since the trust would own the decedent’s assets. The Grantor’s heirs will then receive their designated shares from the trust and not need to go to court to request their inheritance. On the other hand, if the grantor owned any assets that were not funded to the trust or that weren’t jointly owned or didn’t have a beneficiary designation, the Grantor’s heirs would likely need to go through an expensive and inefficient probate process to receive their inheritance – all of which could have been avoided.
Establishing your Trust
The first step in funding a revocable living trust is designing the trust itself to fit your needs based on your specific assets, liabilities, and objectives. You and your attorney should analyze each asset such as your home, investment accounts, bank accounts, retirement accounts, and any business interests and decide how you would like them to be distributed upon death.
At our firm, we provide all clients with an “Asset Inventory” spreadsheet to be completed prior to engagement which we utilize to build a customized trust tailored to their needs. Using this asset inventory, we ensure that each asset is identified and clarify how it should be handled after the estate plan has been executed.
This process typically includes the preparation of deeds to transfer real estate to the Trust and updating beneficiary designations or retitling accounts into the trust. In some instances, it may be advantageous to make certain accounts payable on death to a specific beneficiary (like a spouse or adult child) rather than your Trust for easier administration while in other cases it might make more sense to name the trust as the primary beneficiary or even create new accounts that will be titled directly in the trust, depending upon the type of asset and your unique situation and objectives.
We outline the process of trust funding for various common categories of assets below. While not intended to serve as a comprehensive guide, this should provide a helpful overview to get you started with the process:
Real Property
A person’s home is often one of their most valuable assets. In order to transfer ownership of your home and any other properties, including vacation homes, rentals, and commercial properties to the trust (or to an LLC owned by the trust, where appropriate), the attorney will draft and record a deed that legally transfers title to the trust (or LLC).
Note that properties, especially those owned by married couples, are often owned jointly as community property with a right of survivorship or as joint tenants with a right of survivorship, or tenants by the entirety. In each of these cases, upon the death of one joint-owner, his or her share of the property will pass automatically to the surviving joint tenant(s) without the need for a probate proceeding.
For some married couples who want their property to pass outright to the survivor, this may seem advantageous, but because such a plan does not avoid probate on the second death or in the case of a simultaneous death situation, we generally recommend transferring title to the trust and having the dispositive provisions of the trust control distributions on each spouse’s death.
Bank Accounts
Almost everyone has a bank account, if not several accounts. The first step in deciding how you want to manage your bank accounts is determining if you would like to keep the original accounts as is and just name beneficiaries, or if it is better to open a new account in the name of the Trust. The first option is easier as most banks now allow a trust to be named as the beneficiary, which can be achieved by completing a notarized Beneficiary Change form at a physical branch with your government ID and a copy of the Certification of Trust. With most banks, this process can also be completed online.
The second option is more comprehensive as it allows the successor trustee to step in and manage the assets in the event of incapacity as well, not just upon death. That said, this option is more time-consuming as it requires the establishment of a new account and may necessitate updating direct deposits and automatic bill pays etc. We typically recommend creating at least one new account in the name of trust where feasible and relying on beneficiary designations for the rest of the bank accounts. Contact your bank for more information regarding its’ specific process and requirements.
Investment and Brokerage Accounts
Investment and brokerage accounts can be managed like a bank account, allowing the owner to choose if they would like any funds to be paid upon death to the named beneficiaries (including a trust), or if the assets should be transferred to a newly created account owned by the trust. Depending on the investment or brokerage firm managing your accounts, you may be able to do this online using a notarized Beneficiary Change form. Some investment and brokerage firms may require an in-person appointment at a local branch and request a copy of the Certification of Trust and a valid ID. Contact your broker or firm for more information on applicable forms and rules.
Retirement Accounts
Retirement assets are more complicated because they have tax implications and rely on beneficiary designation forms to determine who receives proceeds. Upon your death, any funds in your retirement accounts are paid to the named beneficiary. These funds can then be used to pay for burial and funeral expenses and any other end-of-life expenses, alleviating potential stress from your loved ones. Thus, ensuring that the correct beneficiary is named is critical.
Generally speaking, it is most tax-advantageous for a married individual to name a surviving spouse as the beneficiary, but again depending upon your specific objectives, it might make sense to name a trust as the primary or secondary beneficiary, or even a charity if you are intending to make a charitable bequest upon death.
Some beneficiary updates can be made online while others may require forms to be mailed or uploaded to the plan administrator. Where anyone other than a spouse is being named as the primary beneficiary, the spouse will likely also need to sign a waiver. Contact your plan administrator for more information on applicable forms and rules.
Life Insurance Policies
Life insurance policies can typically also be funded to your trust by naming the trust as the beneficiary, or you can name an individual or even a charity to receive the funds upon your passing. If you choose to name a person as the beneficiary, the funds would be paid out directly to that person; if you name the trust, the funds will be paid out to the trust and distributed per the trust’s provisions. Depending on your end of life wishes, you may prefer the funds be paid to the trust, which covers burial and funeral expenses as any expense to be covered by the estate. However, you may prefer the funds be paid to your spouse to ensure they have enough money to continue to survive given the loss of income from your passing. Many of these changes can be made using forms to assign the trust as beneficiary. Contact the company you have your life insurance policy through for additional information.
Vehicles
In most cases, we typically don’t retitle vehicles into trusts as this can cause complications with insurance on the vehicles and may create more challenges than benefits and vehicles are relatively easy to transfer after death. You may be able to pass the vehicle to a chosen beneficiary using a document that may be called “beneficiary designation” or “transfer-on-death” form from your state’s Department of Transportation website. Often, this form needs to be notarized, and only becomes active upon the death of the vehicle’s owner.
Alternatively, you can change the name of the ownership of the vehicle on the title. Similar rules apply to those used in real estate. For example, in Arizona, if your vehicle is titled as “and/or” with your spouse, the state looks at ownership as joint tenancy with right of survivorship. This means both parties’ signatures are required on anything that is done to the vehicle. When a spouse dies, the surviving spouse just needs to provide a copy of the death certificate to the Motor Vehicle Division for full ownership, thereby avoiding probate, at least on the first spouse’s death.
Business Entities
If you own an LLC or a share of any business entity, it is important to take the proper steps to fund that interest into the trust, the requirements of which may vary by state. Typically the process may include (a) updating the company’s operating agreement or bylaws, which is a governing instrument that explains how a member/shareholder’s interest should be handled and distributed upon his or her death, as well as (b) filing an articles of amendment naming the trust as a member if the LLC is domiciled in a jurisdiction where the members of the LLC are a matter of public records, and (c) preparing and executing an assignment of membership interest to the trust. It is important to note that not all businesses can be funded into a trust, such as PLLCs; however, you still may be able to assign your business interests to the trust. Contact your attorney for more information.
Cryptocurrency
Cryptocurrency has exploded in popularity in the past few years. Unfortunately, because of how new the asset class is, it’s still not easy to fund these assets into your trust. Most of the major exchanges do not offer a beneficiary designation option. While these assets are not easy to fund to your trust, there are options that allow you to do so.
For alternative options on how to distribute your crypto, contact your attorney or the company managing your crypto.
Funding in the Future
Of course, changes are natural and expected in life. Changing jobs, buying or selling your home, starting a new business, or opening new accounts are among the things you will likely do after creating a trust. It is vital to continuously update your trust through the years to ensure that you meet your estate planning goals. As mentioned above, this is best achieved by using an inventory sheet to track all assets you own throughout your lifetime and having periodic update meetings with your trust. Even if you have a pour-over will, any assets that are not funded to your Trust or titled with a living beneficiary must be probated. Ensuring that all assets are properly funded in your trust will help your loved ones avoid probate court and maintain family harmony.
Conclusion
Trust funding is a critical and often neglected part of an estate planning engagement. Basic assistance with trust funding is included in all our firm’s estate planning packages, and more customized concierge services are available as needed as well. If you would like to work with us on building and funding a customized trust, please email us or call Yaser Ali Law at (480) 442-4175.