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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