The following is a short primer on trust funding:
For a trust to be valid and effective to avoid probate and function in the event of incapacity, it must properly funded with the settlor’s assets. The term “funding” refers to both the transfer of ownership of assets to the trust, and to the designation of the trust as beneficiary under contractual arrangements such as life insurance and retirement plans. Trusts often fail for lack of funding because clients typically do not want to pay an attorney to handle the funding on an ongoing basis and often never complete it themselves. Some attorneys insist on full funding and charge enough to take on that responsibility. Some attorneys leave all funding up to the client. Some attorneys will fund part of the assets, charging a flat fee per item. Some attorneys offer trust maintenance programs with various levels of assistance to help clients stay on track with funding.
Any asset which is a titled asset is generally retitled to show that it is now held in trust. There should be at least three components to the new title: 1) name(s) of the trustee(s); 2) name of the trust; and 3) date of the trust instrument. For example, “Barack and Michelle Smith, Trustees of the Smith Family Trust dated February 29, 2008, and any amendments thereto.”
If the trust is irrevocable, one of the first things the trustee should do is obtain an Employer Identification Number (EIN) using Form SS-4 on the IRS website. If the trust is revocable and the settlor is serving as trustee, the trust will use the settlor’s social security number (if married co-trustees, either SSN will do).
For the great majority of families, the most important asset to transfer into trust is likely to be the family home, along with any other real property. Most estate planning attorneys, even if they do not take on the responsibility of funding, will at least prepare deeds for real property and help the client with execution and recordation.
Although either quitclaim deed or grant deed will suffice, it is generally recommended to use a grant deed because it carries implied warranties that title insurance companies like to see when insuring subsequent transfers. No consideration is required for a transfer into trust. Unless using a Trust Transfer Deed specially drafted for this purpose, the attorney should make sure the deed clearly recites the fact that no consideration is made for the transfer, to show that the documentary transfer tax does not apply. Rev. and Tax. Code § 11911(a). The deed should be executed and then notarized, as notarization is necessary for recordation. While recordation is generally recommended, it is not required for the deed to be effective in transferring title.
A completed Preliminary Change of Ownership Report (PCOR) form must be completed and submitted at the time of recording. In the case of a revocable trust, this form helps the county assessor understand the basis for exemption from property tax reassessment. Rev. and Tax. Code § 62(d). There is a small penalty if the form is not filed, collected at time of recording. More importantly, if the PCOR is not filed then another more complicated and time consuming form will be due in 45 days. Other exemptions exist including one up to $1,000,000 for transfers to children, and possibly to grandchildren if their parents are deceased.
If real property is subject to a mortgage with a due on transfer (due on sale) clause, then there is a danger that a transfer of the real property into an inter vivos trust may accelerate the loan. This is certainly a risk if the transfer is to another individual as trustee, but may be less of a risk with a settlor “transferring” to himself as trustee of his own revocable trust, as that is not in reality an actual transfer though we speak of it that way. An exemption under federal law protects residential real property, of less than five dwelling units, from loan acceleration under such a clause. 12 U.S.C. § 1701j-3(d)(8). Before transferring any other property, such as rental property, it is important to notify the lender and obtain permission.
Real property owned by a stock cooperative. In these cases, the interest is transferred not by deed, but by assignment of the settlor’s share in the cooperative.
Married couples in California most commonly hold title formally as joint tenants, which may create a rebuttable presumption that the property is intended to be held in joint tenancy rather than as community property. Joint tenancy property is given only a one-half step up in basis upon decedent’s death. The IRS must follow state law in characterizing real property, and if the property can be characterized as community property then the IRS must step-up the basis in both halves of the property to fair market value. The surest way to do this, most commonly used by estate planning attorneys, is to have the clients execute two deeds, first transferring to themselves as community property, and then transferring into trust. The property should also be listed as community property on a trust schedule.
Stocks and bonds are typically assigned to trust, through a transfer agent, by endorsing the certificate. Individuals who hold stock in a “small business corporation” may be entitled to special tax treatment under IRC § 1244, and these benefits will be lost if the stock is transferred to trust, so it is generally not a good idea to do so until a thorough analysis is made.
Incentive stock options generally should not be transferred to a revocable trust, due to statutory restrictions and plan prohibitions on transfer.
Brokerage accounts are easy to transfer into trust, using a certification of trust and completing the broker’s forms giving them the proper title format. Mutual fund accounts and deposit accounts at a bank or savings and loan can also be easily transferred using a certification of trust and forms supplied by the institution.
Promissory notes can be transferred with a simple assignment, even if secured by real property. However, in order to protect priority of the trust’s security interest it is best to assign to trust both the note and the security interest and then have the assignment recorded.
Transferring a general partnership interest to a trust only gives the trust a right to distribution—consent of the other partners is required to make the trust a partner. A similar rule operates for limited partnerships.
To transfer a sole proprietorship into trust, the settlor executes a bill of sale.
Personal property that is registered with a government agency, for example vehicles and boats registered with DMV, may have documentation, an identification number, and other evidence of ownership. The agency may have procedures for transferring these items into trust.
Unregistered personal property can be transferred into trust without anything set down in writing, but a written assignment is recommended as evidence of intent.
Firearms pose a special problem because of quirks in California’s Penal Code, relating to transfer of firearms, which could very easily result in one or both spouses committing a felony simply by transferring a separate property firearm (gift, inheritance, or acquired before marriage) into a joint trust of which they are both trustees. Unless that transfer goes through a licensed dealer it is a crime, and no exemption is available. This is probably very common, due to widespread use of blanket general assignments of tangible personal property which do not exclude firearms, so enforcement is not likely. However, given the severe potential consequences from this, it is recommended that firearms be held in a separate gun trust for each spouse and transmuted into the separate property of each spouse. (See www.lawnews.tv for further information.)
Planning for qualified retirement plans and individual retirement accounts is complicated, and the trust is generally not named as primary beneficiary of these plans. However, there may be a reason to do so, for example if the primary beneficiary would otherwise be a minor child, necessitating court involvement over the proceeds. In such instances, a revocable trust can be named as primary beneficiary and a safe harbor called “conduit language” is included which will allow stretchout to continue. However, all of the required minimum distributions must be distributed under this approach. Another approach, using a standalone retirement trust, may allow for accumulations and therefore asset protection, and at the same time allow stretchout based on each beneficiary’s age.
Actual ownership of life insurance policies is generally transferred into an irrevocable life insurance trust (ILIT) if it is to be transferred into trust at all. However, it can be a very good idea, for liquidity and other reasons, to designate the revocable living trust (RLT) the beneficiary of life insurance proceeds. This is done using forms supplied by the insurance company.
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