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HOW TO OPERATE YOUR LIVING TRUST
A Living Trust is a legal vehicle – just like a car. When you buy one you will want to know how to operate it.
A simplistic analogy of a living trust is “like a toy box in which you put all of your toys to safeguard them”. The Trustees are the persons in charge of the toy box. If one Trustee dies another supervises the toy box. The toy box keeps the toys from getting lost. The toy box supervisor makes sure the toys are kept in good order and inventoried.
A living trust is much the same. When you are the Grantor you put all of your assets (toys) in the trust. Then the Trustees make sure the assets are maintained, and that the money and assets in the trust are available for the beneficiaries to play with – all in accordance with the instructions in the trust documents.
As soon as you, the Grantor, put the assets into the Revocable Living Trust (the toy box), you become the primary trustee responsible for the toy box. When you die, become disabled or incompetent, someone else, whom you have designated in the trust will become the successor Trustee.
All Trustees need to know how to manage a living trust. This is important because the Trustees will be the persons responsible to make sure that there are enough toys left for the next generation of children to be happy.
People have various reasons for creating revocable living trusts. The most common are:
The terms of the trust instrument can help reduce or eliminate estate taxes. If probate avoidance is the goal, it can be accomplished by the transfer of assets to Trustee upon the creation of the trust. To avoid probate additional assets, acquired after the creation of the trust, should be placed in the trust by the grantor (the person funding the trust).
Both Trustee and Grantor will need to understand the process of transferring the assets, since, as noted above this is essential if probate is to be avoided. In effect, the Grantor of a trust is transferring property, while he is capable of going so, rather than leaving the assets in his name to be cleared through a probate administration at his/her death. Under most state probate procedures, the living person can transfer his or her own property more easily that a personal representative can on that persons death. A living person has freedom to act with his own property. A personal representative is limited by a will (if any), by statute, by court procedures, and by the taxing authorities. The advantage of a trust is that the property transferred out of the name of the grantor before he dies and into a vehicle which will remain “alive” even after he/she dies, making the transfer of assets to his/her children easy. For a trust to work best, it must be funded. Toys must be placed in a toy box. These guidelines are designed to explain the transfer process and to assist the individual Trustee in administering the trust..
FUNDING THE TRUST
Funding the Trust is crucial. The Trustee can only work with the assets which have been transferred into the trust. The assets of the Grantor must be transferred into the trust, in the name of the Trustee, prior to the death of the Grantor in order for the trust to be complete. Any assets not transferred to the Trustee prior to the Grantor’s death or disability will be subject to a probate administration at his/her death. Many times the documentation to transfer insurance, bank accounts, stocks, etc. can be provided by the financial and insurance institutions and it is suggested that you contact them to immediately transfer your assets. Both the Grantor and the Trustee should be familiar with transferring assets to the Trust. Remember assets acquired after the trust is created must transferred into the trust in order to become part of the body of the trust.
HOW TO TRANSFER STOCKS AND BONDS:
Where all the active Trustee’s are individuals (not bank officers) the most common method of funding the trust with registered securities (stocks and bonds) is to place them in the name of the Trustee of the specific trust. An example of this situation is to register the securities as follows: “John J. Doe, Trustee of the John Doe Living Trust, dated ___________.” Take the shares to your stockbroker or transfer agent and ask him/her to place them in the name of the trust.
Registration or re-registration of securities in this manner is not difficult. There may be some delay upon the transfer of a security while the requirements of the stock transfer agent are satisfied. Securities registered in this manner are not expected securities which are traded actively.
Although, not required, it may be necessary to provide the transfer agent with a copy of the memorandum of trust.
HOW TO TRANSFER UNREGISTERED SECURITIES:
HOW TO TRANSFER REAL ESTATE INTEREST:
For transferring interests in real estate you will to complete a deed of transfer which is usually a warranty deed or a quit claim deed. You will need to check with the local rules of you state for filing one of these deeds. As with transferring securities, the property will be transferred to the name of the Trustee, “John J. Doe, Trustee of the John Doe Living Trust, dated ____________.”
You might also need to present the Memorandum of Trust upon request which states the Trustees powers.
If your real estate is encumbered by Deeds of Trust, or other mortgage documents, we recommend that you consult with the financial institution which holds the Deed of Trust, Mortgage or other encumbrance, to make absolutely certain that the transfer of the property to your trust will not cause any acceleration of your mortgage. This is usually not a problem because your living trust is a revocable living trust which means that you are still the 100% beneficiary.
Whenever you acquire a new piece of property, you may ask the escrow company to title the asset in the name of your living trust.
HOW TO TRANSFER TANGIBLE PERSONAL PROPERTY:
Since tangible personal property such as household furniture and furnishings, jewelry, etc., is without any recognized documentation of title, transferring property to the trust is made by a bill of sale from the Grantor to the Trustee. However, since this property changes constantly, the initial bill of sale should cover any and all tangible personal property now owned or hereafter acquired. A bill of sale of this type should be sufficient evidence of the Grantor’s intent to achieve the desired probate avoidance, especially when the assignment is coupled with a Pour Over Will leaving everything to the trust.
HOW TO TRANSFER BANK ACCOUNTS:
The best approach to transferring the bank accounts to a trust is registration in the name of the Trustee of the specific trust, e.g., “John Doe, Trustee of the John Doe Family Trust”. Check with your financial institution for proper documentation to complete this transfer. You are not required to put the name of the trust passbooks, checkbooks, or checks. You should take a copy of the Memorandum of Trust in case it is needed.
You will also want to change your safety deposit box into the name of the trust. If anything happens to you, a Trustee can have immediate access to the safety deposit box.
HOW TO TRANSFER LIFE INSURANCE:
This trust should be the beneficiary and owner of life insurance policies on the Grantor’s Life. However, if the Grantor is the owner of insurance on his or her spouse’s life, ownership of the policy must be transferred to the Trustee as well. This could constitute a probate asset in the Grantor’s estate if the Grantor predeceases the insured spouse if the ownership of the life insurance in not transferred to the Trust. Contact your insurance company and have them provide you with the appropriate forms for transferring ownership.
It is important to watch life insurance closely. If your life insurance face values throw the value of your estate over $600,000 you will want to confer with an attorney on how to get the Life Insurance out of your estate.
HOW TO TRANSFER RETIREMENT BENEFITS:
The guaranteed portion of any retirement benefits, as opposed to benefits terminating at the Grantor’s death, should be discussed with an attorney familiar with retirement plans before designating the trust as beneficiary.
HOW TO TRANSFER PROMISSORY NOTES AND OTHER ACCOUNTS RECEIVABLE:
The right to receive money, evidenced by documents such as a Promissory Note, is an asset that must be transferred into the trust, just like every other asset. Promissory notes and accounts receivable indicate that you are owed money, but there is no security guaranteeing repayment. You create these rights when you loan money to your children, friends or other business associates. All documents that indicate that you are owed money should be transferred into the trust. If you do not transfer these rights they will have to be probated like any other asset that is not transferred to the trust.
If your promissory not is secured by other property such a personal property and was filed with a UCC Uniform Commercial Code Financing Statement, a Change to UCC (Uniform Commercial Code) will need to be filed in the Name of the Trust.
All other promissory notes and receivables should be transferred to the trust by creating an assignment of Promissory Note/ Receivable assigning it from the grantor to the trust signed and notarized if necessary.
HOW TO TRANSFER RECEIVABLES CONNECTED WITH REAL PROPERTY:
Many assets owned by families and individuals are in the form of monies owed to them which are secured by real property. This area of trust transfers may seem very complicated, especially if you do not own much land or buildings. If this is the case, and all you own is a house, you can transfer it to the trust as previously described.
If you own a Mortgage or a Deed of Trust (Lien) on a piece of property, you may transfer all of your interests in the property to the trust with two documents. An Assignment of Promissory Note transfers the promise to make the payments to the trust. A deed and Assignment of Deed of Trust will transfer you right to control the real property to the trust. Both these documents must be executed to transfer the entire asset. If one of the two documents is not executed, the part of the interest in the property will have to go through probate.
Unfortunately, there are many different ways to won an interest in real property. Sometimes these interests are very complicated. The following is a list of different real property ownerships where you own the right to receive money from the property but not to possess it.
There are five basic real property interests where the property is encumbered with debt, they are:
What is interesting about these interests in real estate receivables is that the Grantors may also be involved in the other side of these interests where you have the right to possess but owe money on it for example the:
HOW TO TRANSFER MUTUAL FUNDS
You may call your stock broker or the Mutual Fund company to ask what they will want to transfer you account to the living trust. The Mutual Fund is a pool of stocks or bonds which is managed by a paid advisor for the benefit of persons who buy into the Fund.
ACQUIRING ASSETS IN THE LIVING TRUST AGTER YOU HAVE ESTABLISHED THE LIVING TRUST
After you have transferred all assets into the living trust, then you will want to be careful to place all new assets into the trust. If you are buying an asset, ask the seller to show on the Deed, Bill of Sale, Assignment or other document of transfer, that the transferee is the “John Doe Family Trust”. I someone is planning to give your money or property, ask them to give it directly to your trust.
IDENTIFYING THE TRUST FOR TAXES
Although a revocable living trust is a separate entity, a federal tax identification number is not required for income tax purposes. The social security number of the Grantor is the tax number of the trust and must be given to banks, corporations and others who pay interest or dividend income to the trust.
PROTECTING TRUST ASSEETS
Once the trust agreement has been signed, and assets have been transferred to the trust, the trust agreement is fully operative as to those assets. At this point, there are certain basic moves which the Trustee should make.
1. Insuring the Trust Assets. Any assets which have been transferred to the trust should be covered and protected by insurance. If an asset is already covered, the insurance policy should be revised to add the trust to a named insure on the policy. This can usually be don by your property and casualty insurance agent at no additional cost. If personal property, a residence, or an automobile have been transferred to the trust, the trust should make certain that these assets are covered by insurance and that the Trustee is the named insured. It is suggested that you send a copy of your Schedule of Assets transferred to the Trust to your insurance agent.
2. Placing the Trust Assets in a Safe Location. Assets such as stocks and bonds, which you have transferred to the trust, should be placed in a safe location, such as a safe deposit box. If the safe deposit box holds only trust assets, and is in the name of the trust, you will have no problem in identifying bearer bonds or unregistered securities as trust assets. There will be a problem if the safe deposit box is taken out in your name alone. If you successfully transfer all you assets to your trust you will have no probate of those assets.
ADMINISTERING THE TRUST
The Trustee is the legal owner of the trust assets. If more that one Trustee is acting, Trustees’ own the trust assets with survivorship rights similar to those of joint tenants. Property held in the name s of Trustees will pass to the surviving Trustee and any successor Trustee at the death of a Trustee. If more than one Trustee is acting, they must act together unless expressly provided to the contrary in the trust agreement. The Trustee is not acting as the agent of the beneficiaries of he trust; his actions are his own, and he is not responsible for them.
Of critical importance in the creation of the trust, is the trust agreement. This instrument instructs the Trustee how to manage, administer, and dispose of the assets transferred to the trust.
These guidelines are directed predominantly at the revocable trust situation; where the trust was created by the Grantor primarily to avoid probate; the Grantor is the Trustee or a Co-Trustee with his/her spouse; and the Grantor is also the primary beneficiary during his or her lifetime. In this type of trust, the Grantor has as much freedom in dealing with his/her assets after they are transferred to the trust, as he/she had before such transfer. As the Grantor and Trustee of this type of trust, the Grantor’s wishes will control the management and disposition of the trust assets during his/her lifetime.
These guide lines are also relevant, to the irrevocable trust situation after on of the Grantors dies, where the trust was created to minimize income or estate tax consequences. After one of the Grantors of a Revocable Living Trust dies, the trust becomes an irrevocable trust. There are certain basic obligations of a Trustee which apply under all conditions, such as the duties to keep records, segregate trust property, and file any required tax returns. The exercise of these functions reflects the fact that the Grantor intends the assets to be part of a trust arrangement under which other parties have interests.
RECORD KEEPING
After the death of the Gantor(s) all transactions involving the trust assets should be carefully documented. You may want to ask an accountant for advice on how to keep records. You will need good records on:
· Income received;
· Income paid out;
· Additions to principal;
· Deductions from principal;
· Principal on hand; and
· Changes in trust investments.
When the trust books are originally set up, the value of each asset transferred to the trust should be determined. It’s much easier to obtain this information while the Grantor is alive, and his records readily available, than to try to track down the information after the Grantor’s death. In addition to satisfying the Trustee’s legal responsibilities, accurate books and records will make the successor Trustee’s job much easier. A Trustee should not feel burdened by accounting responsibilities he/she is unable to handle, a professional accountant should be retained when required, or the Grantor might consider using the service of a bank as “custodian” of the assets, the bank will keep the accounting records for the trust.
SEGREGATION OF TRUST PROPERTY
The Trustee has an obligation to segregate the trust property from the Trustee’s own property. If trust property is commingled (mixed together) with his/her own property, the Trustee will have to prove what property is his. Any doubt will be resolved in favor of the trust. For Community Property States, the Trustees will want to keep records of the wife’s separate property (which her husband does not own.), separate property of the husband, and community property.
While all Grantors of the trust are alive, the Trustee of a Revocable Living Trust has no obligation to file a fiduciary income tax return on federal form 1041 and all income will be taxed to the Grantor. The Grantor should insert the total amounts of each type of income (such as dividends, interest, rents) received by the trust in the appropriate schedule of his federal form 1040.
Some states do not require that a fiduciary income tax return be filed for a living trust. You should contact a CPA, he will be able to tell you whether your state requires a fiduciary tax return. Whatever the case, all income received by the trust should be reported in the appropriate schedules of the Grantor’s individual state tax form.
COMMON MISTAKES WITH A LIVING TRUST
We have seen many mistakes in revocable trusts. We have included some of the most important ones for your information.
1. It is important that all revocable trusts are funded. You must transfer ownership of the assets to the trust. If you do not fund the trust all of the effort to create the trust will be for nothing and the estate will be probated. Probate usually will cost at least 5% of the estate in attorney’s fees. It costs more if you have property or assets in several states. By funding the trust with all of your property, you will avoid these probate proceedings.
2. Your revocable trust must have multiple successor Trustees so that there is always a set of responsible Trustees. In the case where a husband and wife are Co-Trustees, and one spouse dies, it is often common to have the surviving spouse be a co-trustee with one of the children or a close trusted relative. This will often times diffuse family disputes and keep both trustees in check.