Once you have signed your living trust document, the next step is to change titles and beneficiary designations to your trust. This is called "funding" your living trust.
This is probably the most important step in preparing a living trust. If you have signed your living trust document but haven't changed titles and beneficiary designations, you've simply wasted your money. You may have a great trust, but until you fund it, it doesn't control anything - because your living trust can only control the assets you put into it.
Remember, when you put assets in your living trust, you do not lose control of them. You can continue to buy and sell assets just as you did before. And anything you put into your living trust can always be taken out later.
In this section, we'll discuss who is responsible for funding your trust, how difficult this process is, and then explain the general procedures for changing titles and beneficiary designations for the most common types of assets people own. We suggest that you look for the ones you own and skip over the others. If you own something that is not included here, we can council you on how to put it into your trust.
Who Will Fund Your Trust?
You are ultimately responsible for making sure all of your appropriate assets are transferred to your trust. We will help you transfer some assets, such as real estate, into the trust. Further, we will give you detailed instructions on how to transfer your other current assets and how to purchase or re-title future assets.
We also have letters you can send to your bank, investment broker, insurance company, etc. that tell them how your assets should now be titled. Your trust portfolio will give you very specific instructions and the exact wording to use for titles and beneficiary designations. The wording will include the name(s) of the trustee(s), the name of your trust, and the date you sign the trust document. So, it will be something like this: " John Doe and Mary Doe, Trustees of the Doe Trust, dated month/day/year."
How Difficult is the Funding Process?
As you will see in the next few pages, most titles and beneficiary designations are not difficult to change.
Some are done by using an assignment, a short (usually one-page) document that identifies the asset and states that you are transferring its ownership to your living trust.
Others will require written instructions from you, giving the institutions the exact wording to use on the titles and beneficiary designations (usually the pre-written letters from us will be all you need). Some institutions have their own forms that you will need to complete (for example, life insurance companies have standard forms to change the beneficiary on policies).
Some institutions will want to see proof that your trust exists. To satisfy them, we will prepare what is often called a "certification of trust" or an "abstract 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 successor trustees, but it does not reveal any information about your assets, your beneficiaries, or their inheritances.
Most changes can be handled through the mail and by telephone. Some will require your signature to be notarized or guaranteed (we'll explain who can do this for you).
Even though the process itself is not really difficult, it will take some time. How much time will depend on how many titles and beneficiary designations you have to change and how quickly the institutions respond. Most will be cooperative. However, you may encounter a few people who are still unfamiliar with living trusts. (Since living trusts have become so popular, this doesn't happen as often as it used to.) If you do have any difficulties, usually a quick call from us will clear things up.
If you decide to do most of the funding yourself, we suggest that you make it a priority and keep going until you're finished. Start with your assets that have the largest values, then work down to the smaller ones. Remind yourself why you are doing this - and look forward to the peace of mind you'll have when your living trust is complete.
What Happens if I Forget To Transfer an Asset?
Along with your trust we will prepare a "pour over will" that acts like a safety net. When you die, the will "catches" any forgotten asset and sends it to your trust. The asset will have to go through probate first, but then it can be distributed according to the instructions in your trust.
How to Change Titles and Beneficiary Designations
Special note for property bought prior to 1976
If you live in a non-community property state and have owned an asset jointly with your spouse since before 1976, the asset may be entitled to a full step-up in basis when one spouse dies. If you change the title on it now (even to your living trust), you could lose the full step-up - the deceased spouse's share would still get a step-up, but the surviving spouse's share would not. This could cause your surviving spouse to pay more in capital gains tax if he/she decides to sell the asset after you die.
If the asset is your personal residence, losing the full step-up will not be a problem unless the gain is more than $500,000. (If you are married, up to $500,000 of the gain on the sale of your personal residence is now exempt from capital gains tax.) But it could be a problem for other assets like farmland, commercial real estate or stocks.
If this sounds like it could apply to your situation, check with your tax adviser before you change the title.
Your Home, Real Estate, Land, Condominium, Etc.
A new deed will be needed to transfer your real estate into the trust. It will include how the property is titled now (before you put it into the trust), what the new title should be (to put it into your trust) and the legal description of the property. The deed for each property will be signed by you, notarized, and recorded in the county where the property is located.
Out of State Property
If you own property in another state, you will want to transfer it to your living trust to prevent a probate there. We can contact a title company or an attorney in that state to handle the transfer for you.
You may also be able to do part (or all) of it yourself. First find out what is involved - check with an attorney or escrow office in that state to find out the proper form to use, to verify the process, and to get the name and address of the recording office. In some states, your trust may have to be recorded - if so, a certification of trust should be all that is needed. However, it may be more convenient (and wise) to have the local attorney or escrow office handle the transfer for you.
Putting real estate - especially your home - into your living trust should not disturb your current mortgage in any way. Even if the mortgage contains a "due on sale or transfer" clause, re-titling your home in the name of your living trust should not activate the clause. (It would still be a good idea to contact the lender before you transfer the property so you don't inadvertently activate the clause, especially if you own rental property or commercial real estate.)
Homeowner's, Liability, and Title Insurance
Your homeowner's and liability insurance should be changed to reflect your living trust on the title and the trustees as additional insureds. (If you are your own trustee, it will show you as trustee instead of you as an individual.) Your agent will be able to make this change for you (probably at no charge). Usually all the insurance company will need is a letter of instruction from you and a copy of the new deed.
Most owners of real estate pay a property tax every year based on the appraised value of the property. Transferring real estate to a living trust should not cause your property to be reappraised because the underlying ownership is the same (remember, it's your trust) and because the trust is revocable (remember, you can take the property out of your trust and put it back into your individual name at any time).
The county auditor will be notified when the deed transferring the property into the trust is recorded.
Generally, a transfer tax is charged whenever property is sold. Putting real estate into a living trust does not constitute a sale, because you can take the property out of the trust at any time.
Exemption From Capital Gains Tax When Residence Sold
Under current tax law, if you sell your home and you are single, up to $250,000 of your gain (profit) will be exempt from capital gains tax - providing you have owned and made the house your principal residence for at least two of the past five years. (If you are married, up to $500,000 will be exempt.) You can use this exemption only once every two years. Having your home in a living trust will have no effect on you getting this new capital gains tax exemption.
Homestead Exemption From Creditors
Part or all of the value of your home may be protected from creditors' claims under your state's homestead laws. Putting your home in a living trust should not cause you to lose this protection.
Rental Real Estate
Under current tax law, the expenses you have from rental real estate (including mortgage interest, property taxes, insurance, repairs, depreciation, and other operating expenses) can usually be deducted only from rental income.
If you don't have enough rental income (called "passive income") to offset your expenses (called "passive losses") in the year they are incurred, you can carry the excess losses ("net losses") forward and deduct them from rental income in subsequent tax years. If you have not been able to deduct all of your losses by the time you sell the property, you can write them off then.
As usual, there are exceptions:
1.If you earn your living mainly in the real estate business (for example, you are a contractor, builder or broker), you may not be affected by these "passive loss" rules.
2. If your Adjusted Gross Income (as defined on IRS Form 1040) is less than $150,000 and you actively participate in the management of the property (approve repairs and new tenants, write checks, make management decisions, etc.), you can deduct up to $25,000 ($12,500 if married filing separately) in net losses each year from your ordinary income (wages, tips, etc. as defined by the IRS on Form 1040). (If your AGI is more than $100,000, the $25,000 is gradually phased out so that, by the time the AGI is $150,000, the amount of passive net losses that can be deducted from ordinary income is reduced to "0.")
Transferring rental real estate to your living trust does not affect the way you handle these losses while you are living. However, if you are currently allowed to deduct up to $25,000 in net losses from your ordinary income, these losses may be handled differently after you (and your spouse) die.
If You Suspect the Property is Contaminated
You can still put contaminated property in your living trust but the trustee can personally be responsible for any cleanup. If you are your own trustee, this won't affect you because you are already responsible. But, remember, if the clean up is not completed by the time your successor trustee steps in, he/she (and, ultimately, your beneficiaries) can also be liable. If you suspect that property you own may be contaminated, make sure you tell your attorney before you transfer the property to your trust.
Credit Cards, Notes You Owe
Setting up a living trust should not affect any credit cards, loans or notes you owe. These are not assets, so you don't need to do anything with them. You just continue making your required payments as usual.
Mortgages, Loans and Notes Owed to You
If you have "owner-financed" any assets (for example, you "took back" a note on a house you sold), loaned someone money or have any other notes payable to you, you will need to assign these mortgages/loans to your living trust. This is done by an assignment (as we explained earlier). It is signed by you only (not the other party), notarized and attached to the original document. If the original mortgage was recorded, you should also record the assignment.
If you have loaned someone money without documenting the loan, this would be a good time to put it in writing to prevent disputes over the terms and nature of the loan. Write up the terms of the loan and have it signed by the other party. An assignment can then be prepared to transfer the loan to the trust.
Checking, Saving, And Pay-on-Death Accounts
You will need to change the ownership of your checking and saving accounts to your living trust. New signature cards will then need to be signed by the trustee(s). If you are your own trustee, you can sign the signature cards with just your usual signature.
You may need to sign new account agreements. Some institutions will require a new account, with a new account number and new checks. If you are your own trustee, the information on your checks does not need to change - they can still be printed with just your name, address, and telephone number on them - and you continue to sign checks the same way you always have.
If you have named beneficiaries on any accounts, you may want to change them to your living trust. The account title probably includes the words, "payable-on-death" (or "POD"), or "transfer on death" (or "TOD").
Remember, by changing the beneficiary on these to your living trust, you prevent the possibility of the court taking control of the funds if your beneficiary is a minor or incapacitated when you die, or dies before (or at the same time as) you. The institution will probably have its own form to change the beneficiary.
To change the ownership or beneficiary of an account, the institution will probably ask to see a copy of your trust document. However, you can provide an abstract or certification of trust instead.
Certificates Of Deposit
These should be re-titled in the name of your trust. You do not need to cash these in to do this. Some institutions will re-title the certificates immediately with no penalties. If yours requires you to wait until the certificate matures, you can go ahead and change the beneficiary. Then, when the certificate matures, you can change the title to your trust before you renew it.
Note: This process does not apply to IRAs that are invested in CDs. We discuss IRAs and your living trust later in this section.
Credit Union Accounts
Most credit union accounts can easily be transferred to your living trust. To do this, you will need to set up a new account titled in your trust's name and transfer your existing account(s) to it.
Of course, to have an account at a credit union, you must be a member. And in order for your trust to qualify, all "parties" of your living trust - the grantor(s), trustees, and beneficiaries - must be eligible for membership. Since most living trusts only include family members (who are usually eligible to join anyway), this is not a problem for most people.
If you have named a corporate trustee as a successor trustee (which some people do), this may still be okay - because when a corporate trustee steps in, they will usually close the credit union account anyway and transfer it to an account they manage.
If your living trust does not qualify as a member, there are still some things you can do. You can name your living trust as the "pay on death" beneficiary on the account. Then, when you die, your credit union accounts will automatically be owned by your trust.
No special membership card or agreement is usually required when you open the new account for your living trust. The credit union will probably ask to see your trust document, or the abstract, to make sure it qualifies for membership, what the trustee's powers are, who the successor trustees are, and when they are authorized to step in.
Your trust, just like any other member, will be entitled to vote at annual meetings. However, since the trust is not a person, someone (usually the trustee) will need to be given the authority to vote for the trust.
These rules apply to federal credit unions (more than half of the 14,000 credit unions are federally regulated), but even those that are state regulated will often follow these guidelines.
Note: If you think you may want to take out a loan at some point, you should probably keep an individual account with the minimum required balance. That's because your trust would only be allowed to borrow an amount equal to its own value.
Safe Deposit Box
You will need to change the box authorization card to your trust and the trustee(s) will need to sign the card. This will allow your successor trustee to have ready access at your death or incapacity. Your bank or savings and loan officer can help you do this.
If you maintain an account in the name of your bank or brokerage company (called a "street account") or invest in a mutual fund, they will need written instructions from you to change the name on your account to your trust.
Call them first to see if you should send a letter of instruction (remember, we will prepare letters for you) or if they have their own form they can send you, or if they have their own procedures you will need to follow.
They may request that your signature be guaranteed. Your local banker or broker can probably do this for you (just call ahead and make sure). You will sign the form or your letter in your banker's or broker's presence, and he/she will affix a stamp that "guarantees" your signature. A notary seal is not sufficient.
They may also ask to see a copy of your trust document (again, the abstract of trust should be all they need).
If You Possess Certificates
If you have possession of actual stock and securities certificates, you can set up an account at a brokerage house or other financial institution. They will transfer the titles to the name of your trust for you and keep the certificates for you. This way you do not have to worry about misplacing them, losing them in a fire, or making frequent trips to your safe deposit box.
If you are more comfortable keeping the actual certificates yourself, you will need to have new certificates issued in the name of your trust. (Never write or mark on an original stock or bond certificate.) Your broker or banker can have them reissued for you (they may charge a fee).
You can also do this yourself. We can prepare a "stock power," a short document that assigns the securities to the trust, identifies what is being transferred (for example, 50 shares of General Electric stock), the certificate numbers, and the name(s) of the trustees. You'll sign the stock power and have your signature guaranteed (as above). You'll then need to locate the stock transfer agent, this is the organization that is authorized to transfer title on stocks and bonds. For bonds, the transfer agent is usually the institution from which you receive payments on the bond. If you have stock certificates, don't rely on the name of the transfer agent on the certificate - it may be outdated. Call a brokerage house and ask them. We may also be able to find out the transfer agent for you. Send the transfer agent - by certified mail - a letter, instructing them to issue new certificates in the name of your trust; an abstract of trust, the certificates, and the stock power. Make sure you keep copies. And check the new certificates as soon as you receive them.
If you have lost a certificate, contact the transfer agent and request an "Affidavit of Lost Certificate and Indemnity Agreement." Complete and sign the affidavit, and follow the instructions to furnish bond.
Series E, EE, H and HH bonds can be transferred to your living trust with no adverse tax consequences. You will continue to receive current income from Series H and HH bonds. Accrued interest on Series E and EE bonds can continue to be deferred until the bond matures.
To have savings bonds re-issued in the name of your living trust, you'll need form PD-1851. If you have named a beneficiary on a savings bond, you can also change it to your trust using Form PD-4000. (If you are changing a beneficiary on a Series E bond, the current beneficiary will need to sign the form; if this person is deceased, you will need to send along a death certificate.)
You can call the Federal Reserve Bank yourself to order forms or if you have questions (since forms change, make sure you verify which one(s) you need and the procedure). Forms are also available online.
Your car and all other vehicles should be funded into your trust. The title will need to be reissued with the trust name on it. In Ohio, married individual can transfer two cars to a surviving spouse without the need for probate.
If you do title a vehicle in the name of your trust, notify your insurance company so they can change your policy to reflect the change of ownership and list the trustee as an additional insured. (If you are your own trustee, it will show you as trustee instead of you as an individual.) They may request a copy of the new registration and a letter of instruction from you.
Personal Untitled Property
Personal property like artwork, clothing, jewelry, cameras, sporting equipment, books and other household goods typically does not have a formal title. We will perpare an assignment to transfer these items into the trust.
In many cases, you will want your living trust to be the beneficiary of your insurance policies.
Naming your trust as the beneficiary gives you maximum control over the proceeds. It keeps the courts from getting involved if your loved ones are incapacitated, die before you (or at the same time as you), or are minor children. You can keep the proceeds in trust until you want your loved ones to receive the money. You can be sure the money is used to pay your final expenses. And by naming your trust instead of your spouse as the beneficiary, you can even keep control of the funds if your spouse should remarry.
However, if your estate is large enough that it would have to pay federal estate taxes, you should probably consider having a Life Insurance trust to save estate taxes.
These would include life insurance (including split dollar insurance), accident insurance and disability insurance your employer provides for you. Your living trust should be the beneficiary when you have the option. Your employee benefits or personnel department will have the appropriate forms and can help you complete them.
Business licenses and DBAs (doing business as) should be changed to show your living trust as the owner. An assignment is used to transfer business property to your trust.
First check to make sure that transferring your interests to a living trust will not trigger an event covered by a buy-sell agreement. (If it does, you can request that the document be changed.) The appropriate corporate records will then need to be prepared to transfer title. Share certificates will also need to be re-registered in the name of your trust. To do this, a Stock Power (prepared by your attorney) and the certificates will need to be sent to the attorney or officer who handles the transfers.
Subchapter S Corporation
With a subchapter S corporation, both the earnings and any losses of the corporation are passed through to the owners personally. Earnings are taxed only once at the personal level and any losses can be deducted from ordinary income. (With a "C" corporation, earnings are taxed twice - once at the corporate level, and again at the personal level when the earnings are distributed. And, until the corporation is sold or liquidated, losses can only be deducted from corporate earnings.)
Transferring subchapter S corporation stock to your living trust does not cause any change or any problem while you are living. After you die, however, the stock can only stay in your living trust for up to two years - after that, it would lose its "S" status and become a "C" corporation.
But this rarely happens - because two years is usually plenty of time to distribute the stock to the beneficiaries so the "S" status can be retained. If you don't want your beneficiaries to receive the stock outright, the IRS also allows it to be transferred to other trusts that meet its qualifications to retain the "S" status. The IRS creatively calls one of these "qualified subchapter S trusts" (QSST).
Limited Partnerships/Corporations/Limited Liability Companies
If you are involved in any real estate (or other) partnerships, corporations or limited liability companies, your interest should be assigned to your trust. This probably will not disturb the existing agreement or affect your partners in any way, but you should check the agreement or corporate by-laws just to be sure.
The general partner may already have a form to assign your interest to your trust. If not, we can prepare one. The assignment should identify your interest that is being transferred, how the interest should be titled, and that the trustee accepts any liabilities as well as benefits.
Send the assignment to the general partner with a letter instructing him/her to make the transfer. Since other documents may need to be prepared to complete the transfer, you may want to give the general partner a limited power of attorney to sign the other documents for you. (The general partner may charge a fee to do this.)
General Partnership Interests
This transfer is handled in the same way as a limited partnership. However, your signature will probably need to be notarized, and the assignment should include a provision for the other partners to consent to it. The partnership agreement may also require you to send the assignment to the other partners or general partner to sign - as verification of their acceptance - and return the assignment to you.
If you are using a corporate trustee with your trust, they may not be able to serve as a general partner. A special trustee may have to be appointed instead.
Copyrights, Patents, And Royalties
We can prepare an assignment to transfer "Intellectual properties" such as copyrights, patents and royalties into your living trust.
Oil And Gas Interests
The process to put these interests into your trust will vary, depending on the state in which the property is located. You may want to have an attorney in the appropriate state do these transfers for you. They can be tedious - the legal descriptions and depletion allowances must be exact, and you want to be sure everything is done properly.
As long as the membership agreement does not prohibit it, a club membership can be assigned to your trust. Some membership agreements allow you to name a beneficiary - if yours does, it should be your living trust.
Foreign assets can be transferred to a living trust if revocable living trusts are recognized in that country. We will need to contact an attorney in the country where the assets are located to find out if there are any specific advantages - or disadvantages - to putting these assets in your trust and the process that should be followed.