Having a Trust is Half the Battle

As we discussed when we wrote about Living Trusts, one of the benefits of a Living Trust as part of an estate plan is the ability to change the distribution terms of the trust without needing to make changes to all of the assets. Once assets are funded to a trust they remain part of the trust property until they are specifically removed. This raises the question, what does it mean to fund assets to a trust? The funding of a trust requires making the trust the owner (or beneficiary) of an asset. This may sound simple but it is an aspect of estate planning that is often lacking, even with people have taken the time to prepare all of the documentation. Any assets not funded will be required to go through the probate process before the assets can be transferred to the trust and be administered and distributed pursuant to the terms of the trust, Depending on the assets requiring probate, the process can be relatively simple, but may be complex and require a lot of time and fees before the assets reach the trust.

Some assets are very easy to fund to a trust. For example, tangible personal property (including pots, pans, furniture, jewelry, etc.) is assigned to a trust with a one page document that declares those assets are property of the trust. This Assignment even works prospectively so that as a person acquires more “stuff" it all becomes property of their trust. The Michigan Probate Court has accepted these assignments of personal property as transferring assets of trust and therefore not requiring they be probated. Assignments are also commonly used to transfer ownership of business assets, such as L.L.C. Member Interests and partnership to the trust, though in that case it is necessary to review the terms of the company’s Operating Agreement or Partnership Agreement to ensure that those transfers are allowed under the entity’s controlling documents. Transferring stock of a corporation requires the canceling of an old stock certificate and the issuance of a new stock certificate in the name of the trust.

For bank accounts, investment accounts, stock, bonds, and other intangible financial assets a person must generally contact the company that holds the assets or accounts and inform that company of the person’s desire to transfer ownership of the asset to a trust. Many companies have specific types of accounts to hold assets owned by a trust so that the company follows the proper procedures when there needs to be a change of trustee. In most cases this change is simple, requiring a bit of paperwork and providing the company with proof of the trust’s existence (in the form of a Certification of Trust). Occasionally there will be additional requests for information about the trust because a company has particular record keeping requirements. While these requests are common, no company should need a full copy of a trust in order to allow a transfer of an asset to that trust. If a company does ask for such information it is best to have them communicate with the attorney who drafted the trust to ensure that you privacy is maintained and the company follows the law.

While funding a normal investment account to a trust is simple enough, it is important to remember that retirement accounts (IRA, 401k, 403b, etc.), operates differently and must be funded differently. Since you cannot generally change the ownership of a retirement account without negative tax consequences, you must change the Beneficiary Designation on the account in order to fund it to the trust. For married couples it is usually best to name a spouse as the Primary Beneficiary, because a spouse can “roll over” a retirement account into their own name at the death of the first spouse, and delay taking distributions until they reach age 70½. Naming a trust as a Contingent Beneficiary is often an excellent tactic to minimize the number of people involved in administering assets after death and to potentially create better creditor protection for beneficiaries (we will talk more about this in the future). Ultimately, the decision about whether to fund retirement assets to a trust is one that should be discussed with the attorney who drafted the trust and a trusted financial advisor. These people are best equipped to understand the circumstances and help you make good decisions.

A third major asset that needs to be funded into a trust is real estate. This includes primary residences, vacation property, vacant land, and any other buildings you might own. These transfers are made through the use of deeds that are recorded with the County Register of Deeds. The exact form of deed used may vary by circumstance, but again this is an area of trust funding where an experienced attorney’s assistance can be invaluable. That attorney should not only be able to recommend the proper form of deed, but also prepare the deed so it is ready to sign in conjunction with the estate plan and handle the recording of the document with the county.

There are many different types of property that need to be funded to a trust, so it is impossible to discuss them all here today, but as we have recommended repeatedly in this blog the help of an experienced attorney can be invaluable. If a person only receives a set of documents and brief instructions on the need to fund assets to the trust they are being done a disservice. In those circumstances, people frequently fail to fund to the trust and then probate remains necessary after the person’s death. Trust funding is as important to the estate planning process as the documents. Keep in mind that trust funding is part of the estate planning process. It is ongoing and must be updated as a person acquires new assets to ensure a smooth administration of the trust.

Matt and Al

Funding: the Next Step in Estate Planning

     When clients finish signing their estate plans, they often have a look of relief on their faces. They realize, after putting off planning for many years, they now have a plan that will make things much easier for their loved ones if something unexpected happens to them. Of course, signing the documents is not the end of the estate planning process. In order to minimize probate delays, unnecessary costs, and gain the maximum benefit from a Living Trust, clients must take the time to fund their assets to the Trust.
     Clients should retitle major assets, such as real estate and business entities, to ownership by the Trust. This allows the client to retain complete control of the asset during their lifetime and ensure that the successor Trustee can easily administer the property within the Trust, in total privacy, after death. Real estate transfers should include residences, vacation homes, vacant land, and commercial buildings. Business interests should include stock in corporations, and ownership interests in limited liability companies and partnerships.
     It is equally as important to transfer broker, bank, and privately managed investment accounts to the Trust. Again, there is no loss of control during the client’s lifetime and the assets will escape probate costs, time delays and publicity.
     For other assets, clients will need to update their beneficiary designations. For life insurance policies, the primary beneficiary of the policy should be the changed to the name of the Trust. This allows the successor Trustee to immediately access the proceeds for the beneficiaries benefit without worrying what happens if beneficiaries get large sums of money without restrictions, or if a beneficiary dies and there are no alternate beneficiaries. Depending on the terms of the trust, clients may also want to name the trust as a contingent beneficiary on their retirement accounts.
     While you are in the organizing mood, you may also want to give attention to the following:

• Notify those you have named to make decisions under your Power of Attorney and Patient Advocate Designation, and provide them with a copy of those documents.
• Make a list of assets, including account numbers and passwords, and keep copies of statements, deeds and business ownership documents in a specific place.
• Consider having children over the age of 18 execute a Power of Attorney and Patient Advocate Designation so you will be able to make decisions for them should they get into an accident or suffer a debilitating illness.
• If you are traveling and leaving minor children with grandparents or others, provide the caregivers with an Authorization for Medical Decisions, so they can give guidance to medical personnel in the event of an emergency.

     These steps can provide you with peace of mind, knowing that things are in place the event of an emergency. Remember to keeps all of these things up to date, then store them somewhere safe, presuming they will not be needed for many years.

Helping Clients with Their Homework

     Over the past year, we repeatedly referred to estate planning as an ongoing process requiring the participation of the attorney, client, and other affiliated professionals in order to achieve the best outcomes. Nowhere is this more evident than during the recent meeting with couple who have been long-term clients.

     Since the clients executed their documents in 2001, they have relied on us to inform them when the documents needed updating. Over the course of the last dozen years, much has changed in the clients’ lives, and we have kept their plan consistent with their goals. As we reached the end of the meeting and asked if the clients had any new assets that were not funded to their Trust, the husband, somewhat sheepishly, pulled out the funding instructions that they were given in prior meetings and said, "I know I was supposed to do something with this but I never really did. Is that important?" Because this has occurred with other clients, we now take an active role in the funding of our clients' Trusts. We work closely with our clients and there other advisors to insure that when the client leaves our office their assets are funded to their Living Trust.

     Upon discovering that the clients’ Trust owned little, we began discussing their assets, beginning with their real estate. In this case, the clients owned their home jointly. Historically when dealing with real estate most estate planning attorneys have advocated executing a quitclaim deed to a Living Trust but not recording that deed while both spouses are living. This strategy has resulted in many attorneys having filing cabinets full of unrecorded deeds. With the relatively recent adoption of the “quitclaim deed with reserved life estate to grantor”, more commonly known as the "ladybird deed”, unrecorded deeds are unnecessary. We prepared a ladybird deed for the clients’ residence so that they can continue to have the creditor protection of jointly owned property during their lifetime, and the property will automatically transfer to their Trust following the death of the second of them.

     Next, we looked at the clients’ mutual funds and other investments, with the goal to make sure that the clients' Living Trust was the titled owner of all of these accounts. By working directly with the clients’ financial planner we were able to obtain the forms needed to open a new account in the name of the clients' Living Trust, and completed them at our signing meeting. The clients actually had some mutual funds they purchased directly and we suggested they transfer these to their current planner, which the clients (and the planner) thought was a good idea. This allowed us to return the forms and a Certificate of Trust Existence to the planner, who then was able to the transfer of ownership to the Trust.

     We also reviewed the clients' beneficiary designations for retirement accounts and life insurance policies. For this particular client, both the 401(k) and life insurance policies named the wife as primary beneficiary but failed to name a contingent beneficiary in the event that the wife should predecease him. Again, we coordinated with the clients’ financial planner to have change of beneficiary forms ready at our signing meeting. These forms continued to name the wife as the primary beneficiary of the 401(k) plan account and then named the Living Trust as a contingent beneficiary. The new beneficiary of the life insurance policies was the Trust, because upon the death of the husband the wife had total control of the Trust.

     Initially the clients’ financial planner resisted naming the Living Trust as a beneficiary because he was aware of the general rule that required immediate distribution of retirement accounts if a nonperson was named as beneficiary of the 401(k). We made him aware of the important exception to that rule that allowed Trust beneficiaries to stretch distributions over the life expectancy of the oldest trust beneficiary if the Trust contained "see-through provisions", that allow the Trustee to stretch distributions from the 401(k) account over the lifetimes of beneficiaries of the Trust. By requiring that any IRA distributions pass through the Trust we were also able to protect one of the clients’ children, whose spending habits are of great concern to the clients, from electing to take their share of the IRA immediately or over a short period of time and spending it .

     Finally, we looked at the clients’ business interests. Recently the clients assisted one of their children by providing capital to open a small business. In exchange for the startup funds, the client was became a 50% owner of the business. The clients intended that their son would inherit any portion of the business the clients owned at their death, and not involve the other children in the business. To achieve this goal we prepared an Assignment of the L.L.C. interest to the Living Trust and added specific language in the Trust for distribution of that interest to the child in question.

     Trust documents and Trust funding go hand-in-hand. Because as planners we understand that many clients are unlikely to complete "homework assignments" that may be integral to the operation of their planning, it is incumbent on us to find ways to work together to make the process as simple as possible for our clients. For this reason, we strive to be as open and available to both our clients and their other advisors as possible so that we can ensure that the clients are receiving the greatest value from our services.

Alan Ferrara and Matt Ferrara

Potential Problems with Joint Ownership

     Occasionally we speak with someone who believes they have taken care of the bulk of their potential estate planning issues by including their children as co-owners on their bank accounts or other investment assets. Since assets only pass through the probate process if owned solely by the deceased, these clients have indeed taken steps to minimize their estate's exposure to the Probate process. However, these clients have not considered the potential downside of co-owner arrangements.

     Adding children as co-owners of real property or bank accounts avoids the need for those assets to pass through Probate, but it also gives those children the opportunity to make use of those assets in whatever way they see fit. While parents may make their children co-owners of accounts with the best of intentions, unexpected events arise that can result in the child making use of funds that their parent relies on for day-to-day expenses. Even without the child accessing the funds for their own needs, the account may be subject to the claims of the child’s creditors, thus creating the potential for even greater loss to the parent. Even if there are no problems during the parent's lifetime, co-ownership situations can create problems following the death.

     Presume a parent intends to split their estate between three children, but names only a single child as the co-owner of the bank account that holds the bulk of their estate. Following the parent’s death, that single child is the sole owner of the bank account and has no legal obligation to share the assets contained in the account with siblings. Even presuming that the child desires to follow their parent’s wishes to share the assets in the bank account, distribution of those assets now has tax implications for the child, as opposed to the parent's estate. Some clients understand these negatives, but believe that naming their children as co-owners of an account is unavoidable for other reasons.

     As parents age, circumstances often require a child to assist their parents in the budgeting and bill paying process. If this assistance reaches a point where the child is handling most of the check writing, parents commonly add the child as a co-owner on the account for everyone's convenience. This change, while seemingly innocuous and beneficial to the parent, creates the potential for  the problems discussed above. Thankfully, simple estate planning techniques can easily avoid all of these problems and allow children to assist their parents with the minimum of effort.

     By executing an Immediate Durable Power Of Attorney, a parent can give their child the ability to manage the parent’s finances without becoming co-owners of an account. This allows the child to assist their parent with bill paying while protecting the account from the child's creditors. The same result is achievable by changing the ownership of the bank accounts to the name of the Living Trust and naming the child as a current co-trustee. The additional benefit of using a Living Trust is that assets held in the name of the Living Trust do not pass through Probate after the owner’s death.

     Any time an individual gives another person the authority to act on their behalf, there is the potential for abuse of that authority. This is one of many reasons it is important to consult an experienced estate planning attorney before executing documents that grant someone else the authority to act on your behalf. If you have specific questions regarding the use of Powers of Attorney or Living Trusts for you or one of your clients please feel free to contact us directly and we will be happy to answer your questions. 

Matt Ferrara

Eliminating Unrecorded Deeds

    In past blogs, we discussed the importance of properly funding a Living Trust to ensure that estate plans function as intended. Today's blog addresses a long-standing technique for funding real estate to a trust that has fallen out of favor in recent years, but is likely a part of many long-standing estate plans.

     Holding real estate jointly as husband and wife offers significant protection for the property against the claims of either spouse’s creditors. In the past, attorneys were unwilling to cause their clients to give up this protection with respect to real estate in order to fund a Living Trust while both spouses were alive. To address this issue many attorneys recommended executing a Quit Claim Deed from husband and wife to a Living Trust, but not recording the deed while both spouses were alive. Instead, the client or attorney would put the deed in a drawer (or safe) to record later, if something should happen to both husband and wife. Over the years, many unrecorded deeds were placed in drawers, safety deposit boxes, and safes for Successor Trustees and Personal Representatives to discover. Not only will a creditor's attorney argued that these are completed deeds and therefore the creditor protection of jointly owned real estate no longer exists, but these unrecorded deeds can create a great deal of confusion in the administration of an estate.

     In recent years a form of deed known as a Quit Claim Deed with Reserved Life Estate to Grantor, or more commonly a Ladybird Deed has become more widely used because it reduces the need for unrecorded deeds in estate planning. A Ladybird Deed allows the property owners to establish a lifetime right of ownership in the property, including the right to sell or dispose of the property in any way they choose. If the owners take no other action, at their death the property passes automatically to the person or entity, such as a Living Trust, named in the deed, without the need to pass through Probate. This allows a married couple to retain the creditor protection of jointly owning property while ensuring that their Living Trust ultimately controls the disposition of all their property without the necessity of Probate. This type of deed can also be effective for a single person who desires to avoid probate with respect to real estate, but is not ready to transfer property to children because they may have their own creditor issues or because it is impossible to sell property later without the children's permission.

     In most states (including Michigan), in order to be effective, a Ladybird Deed must contain particular language. For this reason, it is important to seek the advice and counsel of an attorney familiar with property transfers prior to signing any new deeds. Failure to include the correct language may result in unanticipated consequences, including loss of creditor protection, an unexpected transfer of the property, or an unwanted uncapping of the property value for the purposes of determining property taxes.

Matt Ferrara

Funding Retirement Benefits to a Living Trust

As part of the trust funding process, I normally suggest that clients change the beneficiary designation of their IRAs and retirement benefits. Most of the time, I suggest that their spouse be the primary beneficiary and the Living Trust be the secondary or contingent beneficiary, because spouses receive better distribution rights under federal law with respect to retirement benefits. If the spouse predeceases the account owner, or if it makes sense for other reasons for the spouse to disclaim the retirement benefits, the benefits then fall to the Living Trust where, in all probability, the spouse remains the primary beneficiary and if the spouse has already died, the beneficiaries of the Living Trust become beneficiaries of the retirement benefit.

After contacting their financial professional, clients will often call me concerned because their financial professional warned them against designating the Living Trust as beneficiary of the retirement benefits because their children will not be able to "stretch out" the IRA over their lifetime, and the entire benefit will be taxable immediately. While this advice may be well meaning, it is often incorrect.

The Internal Revenue Code (the "Code") and Regulations provide that a "designated beneficiary" can use the provisions which allow a beneficiary to take minimum required distributions (MRD's) over their life expectancy. Normally, only an individual can be a "designated beneficiary", therefore a Living Trust ordinarily is not a "designated beneficiary" because it is not an individual. There is an exception to that rule and, if the trust document meets certain requirements, then the Living Trust is considered a "see-through" trust and the regulations treat the beneficiaries of the Living Trust as designated beneficiaries of the decedent's retirement account. To achieve “see through” status, the Living Trust must meet the following requirements:

1. The trust is a valid trust under state law, or would be but for the fact that there is no corpus.
2. The trust is irrevocable or will, by its terms, become irrevocable upon the death of the account owner.
3. The beneficiaries of the trust with respect to the trust's interest in the employee's benefit are identifiable from the trust instrument
4. Required documentation has been given to the Plan Administrator. The Plan Administrator must receive a copy of the trust instrument and a list of all beneficiaries of the trust with a description of the conditions on their entitlement.

If the trust meets all the requirements then the Living Trust beneficiaries are deemed “designated beneficiaries", entitled to receive their MRDs over their life expectancy.

The next issue when a Living Trust is the beneficiary of IRA benefits usually arises at the account owner's death. At that point, clients want to know whether the beneficiaries can split the “inherited IRA” into separate IRAs and make their own decisions about how distributions are made. Generally, "inherited IRAs" received by beneficiaries other than a surviving spouse, cannot be rolled over to their own IRA, but the account can be split into separate IRAs for the trust beneficiaries using the designation "John Doe IRA for the benefit of Beneficiary A", etc. Beneficiaries can then decide the manner in which they want their IRA distributed. One beneficiary may take a lump sum distribution, pay the tax and invest or spend the rest. Alternatively, a beneficiary can decide to take MRD's over their designated life expectancy, deferring income tax until future distributions are made.

Along with the question of splitting an “inherited IRA”, is the question of whether the MRD's are based on each beneficiary's own life expectancy or on the life expectancy of the oldest beneficiary.

Regulations §1.401(a) (9)-8, A-2 provides the general rule that if the account owner's benefit is divided into separate accounts no later than the last day of the year following the calendar year of death, distributions subsequent to the division are treated as separate accounts and each beneficiary of each separate account can use his/her own life expectancy in determining minimum required distributions each year. However, this rule does not apply to beneficiaries receiving a "separate share" through a trust that was the beneficiary of an IRA. Therefore, even if beneficiaries split the IRA into separate accounts for each beneficiary, all the beneficiaries must use the life expectancy of the oldest beneficiary of the Living Trust in determining their MRD's.

The law and regulations governing “inherited IRAs” is both vast and complex, before designating beneficiaries of retirement benefits, you should consult with a professional expert in that area. At the death of the account owner, it is important to seek additional advice as to the best way to retitle the accounts or distribute the assets. These experts should take the time to understand your unique situation and provide you with an understanding of the consequences of decisions, not just provide you with the forms needed to make changes.

The Importance of Regular Document Review

Many of my clients, after signing their estate planning documents, express with relief, “I'm glad we’re done with that task". Whenever I hear that statement, I remind my clients that, while executing documents is an excellent first step in the estate planning process, as their life changes, their documents may someday need changes, updates, or revisions. I suggest three primary events that should cause them to review and possibly update their estate planning documents:

 Substantial Change in the Value of Assets

An important goal of estate planning is to minimize or avoid gifting and estate taxes. As asset values increase, especially the point where a portion of the estate may be subject to estate taxes, it is critical to review documents to determine if the current strategies implemented are sufficient to achieve planning goals and to determine if different or additional strategies are advisable to protect against possible tax liability.

As assets increase, it may be advisable, or desirable, to take advantage of advanced gifting strategies for loved ones. This not only benefits family in the near-term, but also reduces the value of the future estate, thereby reducing estate tax liability. Certain gifting strategies also have an effect on income tax liability. By transferring income-producing assets to children or grandchildren, the income created by those is taxed at a lower rate due to the new owner’s lower total income.

In addition to reviewing an estate plan in regards to eventual distributions, as assets increase it is important to make sure additional assets are appropriately included in the trust property. Proper funding is important to achieve the second goal of estate planning, probate avoidance.

An increase in assets is not the only reason to review estate plan documents. If the value of assets decreases, it may be possible to simplify an existing estate plan by eliminating revocable trusts that are no longer necessary. Additionally, existing gifting plans may require review to ensure the existence of sufficient assets to provide for continued personal well-being.

Change in Family Situation

The family situation and dynamics are rarely stable, with many possible events creating a desire to modify an existing estate plan. Those events include,

1. The birth of additional children
2. The birth of grandchildren and a desire to provide for their future in addition to, or in lieu of, providing for children
3.  A special need arises with a child or grandchild
4.  A child demonstrates greater maturity earlier than anticipated, or perhaps demonstrates significant immaturity, raising questions about their ability to handle funds
5.  A parent or another elderly relative indicates a potential financial need
6. The need to remove an ex-spouse as a beneficiary following divorce
7.  In contemplating remarriage the need to ensure protection for both a new spouse and children from a prior marriage
8.  A significant change in personal health
9.  For any number of reasons, those people chosen to act as guardians for minor children, trustees, or persons designated to make legal or medical decisions in the event of incapacity are no longer appropriate choices.

These and many other naturally occurring family events require periodic review to make sure that estate plan documents reflect the changing situation and present desires.

Changes in the Law

Since 1976, almost every year has brought a modification to federal estate tax statutes. Case law is constantly evolving as the Internal Revenue Service litigates positions in opposition to strategies used by taxpayers to minimize or eliminate estate taxes. In addition, state law as it relates to probate, trusts, and powers of attorney and patient advocate designations has changed a number of times. Regular review of documents and the status of the law help ensure maximum estate tax and probate savings.

These three factors may have different relevance for clients with different situations. For an older client whose assets remain constant there may be little need to revise estate planning strategies for tax law changes, but it may be more important in the family dynamics change concern arises for beneficiaries with previously unforeseen issues. For younger clients with growing families and growing balance sheet, document review becomes important as assets approach taxable levels, or the birth of children creates an increased need for protection in the event the unexpected occurs.

Whatever the reason, it is important to be mindful that in order to provide maximum protection for loved ones and minimize potential tax liability estate planning must be an ongoing process. For younger families with rapidly changing lives, a review every three to four years, or perhaps even more frequently, is advisable. For families in more mature or secure situations, less frequent review is necessary. A good estate-planning attorney should provide guidance when there is a change in the law that affects existing documents, but since a client’s personal life rarely makes front-page news it is important to keep attorneys apprised of major life changes. This allows them to provide guidance and support that creates peace of mind from knowing that an estate plan continues to provide protection for loved ones.

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.