Trust funding is where most of the mistakes get made in estate planning. Poorly advised and managed clients often come to me confused, frustrated and upset because they don’t understand what they are doing and feel like someone sold them a set of documents and did nothing else for them. I believe that part of my job is to fully educate my clients so that they know what to do now and in the future as things change. In trust funding there are basically three categories of assets, those without beneficiary designations, those that have beneficiary designations and have tax ramifications and those that have beneficiary designations and do not have tax ramifications.
1) Assets with beneficiary designations
A beneficiary designation is a contract between you and a third party (normally called a “custodian”) that when you die they will pay the proceeds of the asset to a person named by you in the beneficiary designation form. In this type of asset for estate planning purposes we do not care who the owner is because of the existence of the beneficiary designation. This is because for estate distribution purposes the trust will not distribute the asset, the custodian will so the important person in this situation is not the owner of the asset but rather the designation of the beneficiary.
A) Assets which have tax ramifications
IRA’s, 401k’s, 403′s (also known as “tax qualified assets”), along with annuities are what I call problem children in estate planning. The reason is that the IRS and State have not collected income tax on the money that is placed in the account or the earnings on that money. And as we all know, sooner or later the tax man always collects. So when the owner of the account is married, in all situations absent a pending divorce, THE SPOUSE IS ALWAYS THE PRIMARY BENEFICIARY!!! That is the easy part because the spouse gets to roll over the money without paying taxes on it. Now as to the contingent (alternate, secondary) beneficiary, it is a difficult decision whether to send it to the trust or directly to children or other beneficiaries. There is no right or wrong answer in this situation as you must weigh several factors in making this determination. I spend ample time with my clients individually to help them decide what is best for them.
B) Assets which have no tax ramifications
This class of assets usually includes assets such as life insurance contracts and credit union accounts. As to life insurance, all proceeds of life insurance are income tax free so you don’t have to worry about tax ramifications. So as to the beneficiary designation, you can do one of two things. You can make the trust the primary beneficiary and keep it simple, or you can make the surviving spouse the primary beneficiary and have the trust named as the contingent beneficiary. The practical result is the same which is that when both spouses are gone all the money goes directly to the trust. Some spouses seem uncomfortable not being the primary beneficiary but this is more a perception issue rather than a practical reality since when one spouse dies the surviving spouse is in control of the trust anyways.
As to credit union accounts, most people do not realize that they all have beneficiary designations on them unlike regular FDIC bank accounts which do not have beneficiary designations on them. I generally prefer that the clients have the trust as the primary beneficiary and keep things simple.
C) Assets that do not have a beneficiary designation
Real estate, bank accounts and investments (be they mutual fund or stocks and all other similar assets) all have two things in common, they have a document of title declaring who the owner is and they do not have a beneficiary designation on them. Therefore, for trust funding purposes you have to change the name on the account from the individual to the trust.
With regard to real estate, grant deeds have to be prepared and properly recorded at the appropriate county recorder/clerk’s office changing the title from you as the owner to you as Trustee of your revocable trust as the new owner. Since it is not a transfer to a third party, there is no reassessment for real estate property taxes.
When you refinance or take out equity lines of credit, you have to watch carefully that the escrow or loan people don’t have you sign a deed taking the real estate out of the trust and putting it back into your individual name. This is because many old school institutions don’t like loaning money to trusts although more and more are getting up to speed in doing so. So you have to make sure that if they take the house out of the trust, that they prepare another deed putting the house back into the trust once they record their new mortgage or deed of trust. I’d say over half the time this doesn’t get done and if it doesn’t you are facing a probate situation when you die because if the trust doesn’t own it, the trust document doesn’t control it and off to probate you go.
With regard to other assets such as all investments and bank assets, just either go to the institution and change the name on the account to the trust while you are there or call them and request that they do it for you. You do not have to change the tax identification number since the trust is revocable, it remains just like it is with your social security number as the tax ID number for the trust. In some instances the institution will give you a Certification of Trust form to fill out. My clients call me all the time and I walk them through the form in a few short minutes.
If you need to transfer your stock certificates into your Trust, you should notify your broker and/or the company that you own the shares in for specific instructions. As to all investments under management with a financial advisor or broker, a good one will help you take care of all of this in an efficient and timely manner.