Thursday, October 25, 2012

Trust Funding—Filling the Trust-Bucket to Avoid Probate

As we have previously discussed, executing a Trust creates a legal entity that can own property. However unless steps are taken to transfer property to that entity, even the best-drafted Trust will provide very little value. I have previously referred to a newly executed Living Trust as an empty bucket. The Grantor/Initial Trustee carries the trust-bucket around during their life and makes use of its contents. If the trust-bucket does not have any assets in it, then the bucket is not doing its job. Thankfully, the process of funding a Trust, though sometimes complex, can be completed and provide protection.  Examples of  items to place into the trust-bucket are:
Tangible Personal Property Tangible personal property includes all the property a person owns that is movable; this includes clothing, furniture, and other household goods. Tangible personal property also includes items such as artwork, unique collectibles, firearms, and jewelry. These items are added to the bucket (and thus funded to the trust) through the execution of an Assignment of Personal Property. In our office, when we draft a Living Trust we automatically draft an Assignment of Personal Property. This ensures that before the client leaves we know that their Trust is the owner of their tangible personal property.
Real Estate.  The next item commonly funded to a Living Trust is real estate, such as a residence or vacation home. In order to fund real estate to the Living Trust the Grantor executes a quitclaim deed transferring the property to the Trust. Upon signing the deed, the Trust becomes the owner of the property. State law then requires recording of the deed with the county to ensure a complete record of property ownership exists. It is worth noting that in some circumstance it is more advantageous, primarily for creditor protection, not to fund real estate to a Living Trust. The decision to fund real estate to a Trust is a discussion that each individual needs to have with their attorney to determine what the best course of action is in their particular set of circumstances.
Investment Accounts   The third type of asset to place in the trust-bucket is accounts with financial institutions. Funding these assets to a Living Trust ensures that not only do those accounts pass directly to the beneficiaries without the delay of probate, but also that the Successor Trustee has access to those assets upon the death of the Grantor in order to make any payments that need to be made prior to making distributions to the beneficiaries. A subset of financial account assets frequently handled by banks and financial advisers is life insurance policies, IRAs, and other retirement accounts. These accounts are not funded to the Living Trust during the owner’s life but instead the Living Trust is one of the designated beneficiaries of the accounts at the owner’s death. In the case of life insurance policies, we recommend that the Living Trust be the primary beneficiary for the policy. This ensures this ensures that at the death of the insured party the proceeds from the insurance policy are distributed directly to the Living Trust. As for IRAs, if our clients are married we recommend that they designate their spouse as the primary beneficiary of the IRA, because spouses enjoy preferential distribution treatment, and then name the Living Trust as a contingent beneficiary.
Business Entities.  The final assets commonly funded into a Living Trust are interests in Business Entities such as Companies, Corporations, and Partnerships. The funding of these interests to a Living Trust is completed with an Assignment. This Assignment can occur any time after the signing of the Living Trust, and if the Entity issues stock certificates those certificates need to be updated to reflect that the Living Trust is the owner of the interest. When funding a business interest to a Living Trust it is important to review the Operating Agreement for the business entity to ensure that there is no restriction on transfer of stock to a living trust.
After all this funding is complete, the trust-bucket now contains bank accounts, investment accounts, deeds to real estate, and interests in business entities. Insurance policies and IRAs designate that they pay out directly to the Living Trust and thus those assets drop into the bucket at the death of the owner. All of this ensures that when the Grantor/Initial Trustee passes away and the Successor Trustee comes along to pick up the bucket and follows the instructions written inside it, all of the Grantor’s assets are in the bucket and there is little to no need to deal with the Probate Court.
In the event that a Grantor has not funded an asset to the Living Trust prior to the Grantors death, a properly drafted estate plan will include a Will that designates the Living Trust as the sole beneficiary of the entire probate estate. This means that any asset that needs to pass through the probate process will end up as a Trust asset for the Trustee to distribute pursuant to the terms of the trust. While this will act as a safety net, catching anything that happens to be missed in the initial planning process, like all other circumstances involving a safety net the intention is to never need to make use of that net.
Each individual's circumstances are unique and due to those unique circumstances, it may not benefit an individual to transfer an asset into the name of the trust. These circumstances are one of many reasons that it is important to consult a licensed attorney to assist you with estate planning and to share information openly with that attorney.

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