You’ve had your trust documents drafted and signed, now you assume your estate plan is in place and no further action is required. Unfortunately, this is not all that needs to be done to ensure your estate plan is effective. For any trust to have actual value, it needs to be funded.
The process of funding your trust is essential to leave property, cash, and other assets to your beneficiaries. Learn more about trust funding and proper titling below.
Funding is the process of moving assets, such as money and property into the appropriate trust. To fully understand funding, imagine your trust as an empty bucket. The bucket by itself doesn’t offer much usefulness, but once you fill the bucket up, it has a purpose. Trusts function similarly in that they are only useful when they have money or property in them.
The funding process involves retitling your assets in the name of your trust. Bank accounts, property, and any other assets will need to be titled in the trust’s name in order for them to be included in that trust, otherwise, it will remain empty. This can be done in one of two ways:
By doing this, your trust can be easily handed over to a successor trustee to manage in the event of your incapacitation - without the need for court intervention. Your successor trustee will have the right and responsibility to use the assets placed in the trust for you and your beneficiaries while you are unable to manage those things on your own. Fortunately, fully funded living trusts are exempt from the probate process, which provides a superior method of managing the trust for streamlined asset distribution and much more.
To properly fund your trust, you’ll need to work with the financial organizations you bank with to transfer ownership of your accounts into the trust’s name. Any real property you own will also need to be transferred into the trust’s name which may require a new deed to be signed with the correct information. Take a look at some of the common types of property that can be included or funded in your trust:
Accounts including checking, savings, money market, and certificate of deposit (CD) should all be regularly funded to your trust. To do this, you’ll need to work with the bank or credit union in which you have accounts to retitle them into your trust’s name. Commonly, you will be required to provide a certificate of trust that contains information the financial institution will need to complete the transfer. Just be sure that there are no early withdrawal penalties for retitling your CD accounts.
Real estate may refer to your personal residence or another property (commercial, residential, or industrial) owned by you. Real property refers to the interests associated with property such as mineral or timber rights. Both types of property will require the help of an estate planning attorney to prepare the appropriate documents and ensure the property deeds are signed and sealed specifically for your trust.
Investment accounts will also need to be transferred into your trust’s name which can be accomplished through your financial advisor or broker of a custodial account. To do this, a certificate of trust is often necessary for proper retitling of your investments.
Personal effects may include items such as jewelry, furniture, clothing, photos, artwork, collections, tools, vehicles, and more. You can easily move these items into your trust by signing an assignment of personal property.
In regards to your life insurance, it’s best to name your trust as the primary beneficiary of the policy so that the trust has authority over the earnings garnered from said policy. It is then customary to name loved ones or other special persons such as a spouse, partner, or child as secondary beneficiaries. Most insurance companies have processes in place that allow these changes to be made easily. To change the primary beneficiary on your life insurance policy, contact your insurance agent to get the proper beneficiary designation forms filled out and filed.
Retirement assets may include individual retirement accounts (IRAs) and 401k plans. Typically, it is not recommended to transfer ownership of these accounts to your trust due to the serious tax implications they pose for the plan’s owner. Before you assign your trust as the primary beneficiary on your retirement accounts, it’s crucial that you understand the potential tax consequences associated with this plan of action. Fortunately, your estate planning attorney can help you assess these risks and make the most appropriate decision for you.
The most common types of property are listed above, but these aren’t the only assets that you may want to be funded into your trust. To ensure that your legacy goes to the appropriate beneficiaries, and to avoid probate, it’s important to include all of your assets in your trust. Some of the other types of property that should be funded into your trust include:
Your estate plans matter more than you may think. While many people assume they don’t have adequate assets to warrant the need for a living trust or other types of estate plans, this isn’t the case. Reputable estate planning attorneys can help you develop an effective estate plan that safeguards your assets and ensures your legacy for generations to come.
Connect with Anderson, Dorn & Rader today to have your trust documents drafted and titled, and your trusts properly funded. We’ll help you retitle your accounts and ensure correct ownership of your property for an effective estate plan.
States are all over the board on their income taxation. An individual in a state with a high state tax rate could use a nongrantor trust to hold some of their income-producing assets and thereby avoid state income taxation on the income from those assets.
Briefly, trusts may be taxed as grantor trusts or nongrantor trusts. A grantor trust is taxed directly to the grantor, so this type of trust doesn’t help if you’re trying to avoid your state of residence’s income tax. However, a nongrantor trust is a separate taxpayer. As such, a nongrantor trust could be a resident of a different state than its grantor.
Let’s look at a quick example: Mary sets up an irrevocable nongrantor trust in Nevada, a state without any state income tax. She avoids any triggers for the trust being a resident in any other state. The trust has no income that would be deemed sourced from another state. Thus, the income of the trust would face no state income taxation.
However, states have complicated rules on when they will try to tax a nongrantor trust as a resident. States tax based on where the trust is administered / trustee is resident, where the beneficiary is resident, where the grantor was resident when the trust became irrevocable, etc.
Each state has a different set of rules. Here’s a link to a helpful chart of those rules for nongrantor trusts.
Just because a trust is administered in a state without an income tax does not mean that other states might not try to claim the trust as a resident of their states. Let’s look again at the example of Mary’s trust set up in Nevada. If Mary were a resident of Maine when she set up the trust, Maine would consider the trust a resident of Maine. If the beneficiaries of the trust were residents of California, California would consider the trust a resident of California. When a state considers a nongrantor trust to be a resident, it will tax it on all its income, not just the income derived from sources within that state.
Kaestner v. North Carolina examines the constitutionality of a state taxing a trust as a resident when the trust is not administered in the state and the trustee doesn’t live in the state. The North Carolina Supreme Court held it was unconstitutional for the state to tax the trust under those circumstances because there weren’t sufficient contacts with the state. Here’s a link to that case. The U.S. Supreme Court decided to hear the appeal in the case, so we could see new developments in this area before too long.
If you set up an irrevocable nongrantor trust in a state without a state income tax and you scrupulously avoid triggers which would consider the trust to be a resident of any other state, you can avoid state income taxation on the assets you put in the trust. Kaestner could simplify this process.
Often, the smallest things have the most sentimental value. Your grandmother’s silverware or your grandfather’s railroad watch could connect you to them in a special way. Your mother’s ring or your father’s Boyscout bugle could hold a special place in your heart. Your sports memorabilia could connect you to one of your children in a unique way. You may want those items to go to particular beneficiaries who will cherish their sentimental value as you have. There’s an easy and flexible way to do that.
When your will or trust is drafted, it can include a disposition of “tangible personal property” through a list external to the document. Tangible personal property includes things you can touch, like the items listed in the paragraph above. It does not include real estate or intangible assets like bank accounts, cash, etc.
In most (if not all) states, if your will or trust references a tangible personal property list external to the will or trust, the list is valid to transfer the items detailed on that list to the beneficiary identified. The list would reference your will or trust and would provide for the disposition of the specific item of tangible personal property with a description of the item and to whom it should go. The list must be signed and dated every time you update it.
The unique thing about the tangible personal property list is that it does not need to be executed with the formalities of a will or trust. For example, the list does not need to be witnessed or notarized, even though the document referencing the list needed additional formalities. If you change your mind, you can simply update the list and sign it and date it again.
The list is an easy and flexible way to earmark items to your desired beneficiary. The flexibility can be important. Let’s say that you have an athletic daughter and you were leaving all your sports memorabilia to her. Then, your grandson earns an award in a swimming event. You may want to decide to give your diving trophy to your grandson since it’s a way for him to remember the special bond you share. You can simply update the list with the new disposition and sign it and date it.
Often, clients want to continue to control their beneficiaries after death, just as they’ve done during their lifetime. They want to etch in stone the exact circumstances under which distributions should be made to the beneficiaries. Sometimes they think the beneficiary will have to go to the tombstone like a confessional or ATM.
The problem is the client doesn’t know what may happen in the intervening years. Here are just a few of the several things that regularly change after a plan has been drafted:
Rather than trying to precisely anticipate every possible future scenario, which is a fool’s errand, it’s better to put that in the hands of the trustee. The trustee can be given discretion to withhold distributions based on pre-set factors such as:
That’s not to say you shouldn’t set forth your general wishes. But, most of the specifics should be left for the trustee to decide.
For example, a client in San Francisco in 1990 might have decided to provide for a beneficiary’s rent and set forth a specific dollar amount of $1,000 to cover it, expecting that would be ample. It would be much better to give the trustee discretion to pay for the beneficiary’s support, in the trustee’s discretion. Imagine how the average rents have changed over two decades in San Francisco, where the rent of even a studio apartment is now over $2400. If a specific dollar amount were used, even inflation-adjusted, it would not allow the flexibility to respond to the changing world. Giving the trustee discretion achieves the desired result: to pay for the beneficiary’s rent.
The trustee selected by the client is in a much better position to judge when a distribution should be made, for rent in the prior example. The first five letters say exactly what you should do with them: t-r-u-s-t them. Trust that the trustee will make the right decision. If you don’t trust that person, put someone in that role whom you do trust.
The client can only gaze into a crystal ball and wonder what might happen in the world and in the beneficiary’s life. Trustees have the benefit of 20/20 hindsight. They know what has happened since the client drafted their estate plan and died. They know the beneficiary’s circumstances and they know the current state of the world. They are in a far better position to make a decision.
If you would like to learn more about wills and trusts or other estate planning matters, attend one of our upcoming Webinars. They are free to attend, and you can get all the details if you visit our Webinar information page. Or you can call us to arrange a free consultation to discuss living trusts, or other estate planning matters, at (775) 823-9455.
Once the world began to get over the shock of the death of music legend and golden girl Whitney Houston, reports began to surface that there was trouble brewing with regard to her estate. Houston was found dead in her Beverly Hills hotel room at the age of 48 and left behind only one heir -- 18 year old Bobbi Kristina. While fans rushed to buy anything related to Houston, Houston’s family was already poised for a fight over her estate with Houston’s ex-husband Bobby Brown. With the news this week that Houston left behind a trust, everyone in Houston’s camp can breath a sigh of relief.
Despite unprecedented success in her professional career throughout the 90s, Houston was plagued with personal problems as a result of a battle with drug and alcohol addiction as well as a stormy relationship with Bobbi Kristina’s father, singer Bobby Brown. After finally divorcing Brown in 2007, Houston appeared to be on the road to a comeback when she was found dead last month.
While Houston’s daughter is of age to inherit directly, she allegedly battles her own issues with drugs and alcohol, making her susceptible to a claim that she is unable to handle her own finances and in need of a conservator. Houston’s family was reportedly worried that Brown would petition a court to become her conservator, effectively gaining control of Houston’s fortune. Houston, however, apparently thought ahead and created a trust for Bobbi Kristina. By creating a trust, Houston put a stop to any attempts to gain control of the money and put control of the money in the hands of someone she hand picked as trustee.
A trust is often used as an estate planning tool in order to accomplish a variety of goals. At its most basic, a trust consists of a grantor (sometimes called a settlor, or trustor) who establishes the trust, a trustee who administers the trust assets, at least one beneficiary, and assets to fund the trust. Often, all three positions -- grantor, trustee and beneficiary -- can be held by the same person. Beyond that, trusts come in numerous forms that range in complexity; however, one simple distinction centers around whether the trust is revocable or irrevocable. Understanding some of the important features of the two options can help you decide which one is right for you.
All funded trusts, including the revocable trust, avoid probate. What this means is that the funds held in the trust are not required to pass through the often lengthy legal process that follows the death of the grantor, making the trust benefits available to the beneficiaries in a much more timely fashion. A much more important aspect of a revocable trust is that a revocable trust, as implied by the name, can be revoked, amended or modified by the grantor at any time. This feature can be very important if you feel that you may wish to change the beneficiaries or the specific terms of the trust at some future point. This flexibility makes a revocable trust an attractive option for most people.
An irrevocable trust cannot be revoked, amended or modified without court intervention in most states. Under most circumstances, the grantor may not be the trustee or the beneficiary. All control and access is delivered to an independent trustee and a third party beneficiary. What the grantor receives, however, for giving up the ability to control the trust is asset protection, probate avoidance, possible estate tax avoidance and potential income tax and, when the beneficiary is a charity, capital gains tax advantages. These are highly complex strategies and must be entered into with appropriate caution. The expertise of a qualified estate planning attorney should always be sought.
When you create a trust, one of the most important decisions you must make is who to appoint to succeed you as your trustee. Although each trust is unique, there are some basic considerations that you may wish to take into account before making a decision regarding the appointment of a trustee.
