Transferring Assets to Your Trust - Funding Instructions
Transferring Assets To Your Trust(s)
The purpose of these instructions is to advise you of the methods by which assets should be transferred to your Revocable Living Trust. The format we recommend for titling assets is provided in the Letter of Instruction given to you at the signing of your trust. The material included here will relate to the most common type of assets that may be held in the name of the Trustee(s), or where the Trustee is to be named beneficiary of an account, thrift plan, or insurance policy.
These instructions are general in nature and apply to both joint and single Revocable Living Trusts. We recommend you keep these instructions for future use when acquiring new property to ensure that the assets are acquired in the name of the Trustee(s). In specific cases or if there are issues that remain unresolved or which arise in the future regarding your transfer of assets to your trust, be sure to seek advice of counsel right away.
BANK/CREDIT UNION ACCOUNTS
We recommend that the ownership of most accounts located at banks, credit unions, and/or Federal savings banks be changed to your Revocable Living Trust and retitled in the name of the Trustee(s). (A joint checking account, if the balance is minimal, may remain outside of the trust.)
To accomplish this, you would simply show your Branch Manager (or the individual handling new accounts) our Attorney Certification Letter that provides the proper name for the Trust account. You may be asked to sign a new signature card(s) as trustee(s). If you are your own trustee, sign the signature card(s) with your usual signature. You may also need to sign new account agreements. You should find that the task of transferring this asset to the name of the Trustee(s) to be quite simple. If not, have the bank officer call us.
If you have named beneficiaries on any accounts, you will want to remove the beneficiary designation and place the account in your trust. For example, you may have an account that names your spouse, a child/children, or grandchild/grandchildren as beneficiary. These are probably "payable on death" (POD) accounts, or "transfer on death" (TOD) accounts. If you want to leave the accounts outside the trust, then change the beneficiary designation on these accounts to your trust (i.e., P.O.D. Trustee). This way you prevent the possibility of probate or the court taking control of the funds if your beneficiary is a minor or incapacitated when you die (or if that beneficiary dies before you). Your trust agreement will specify special provisions for a minor or disabled beneficiary -- if it does not, let us know immediately.
After putting an account into your trust, the financial institution will request to see a copy of the Trust document (or the front and last pages). This is for their protection and yours. Quite simply, they do not want the liability of changing titles on your assets unless they know the trust document is valid, who the trustee is, and what powers the trustee has. We recommend you have a signed copy of the original trust with you so that they can make a photocopy for their file. Make sure that the signed copy is returned to you. If you want to keep your trust distribution plan confidential, we can prepare for you a Certificate of Trust Existence, which sets forth only the general provisions of your trust document, but omits the disposition provisions and names of beneficiaries. There is a nominal charge for the preparation of this Certificate.
If you name Co-Trustees on your Trust, we may have provided language in your Trust making it possible for either Co-Trustee to sign documents/checks and make withdrawals from any savings, bank account or other account held in the name of the Trust without the necessity of both signatures. Normally, we provide that signatures of both Trustees will not be required where spouses are serving as Co-Trustees. If you are a Co-Trustee or you have specified either Trustee may sign, it may be necessary for you to specifically point out the applicable section of the trust (sole signature clause) to the financial institution to make sure that this authority is clear. Request the institution mark their signature card(s) in such a way so all tellers and bookkeeping will know that a single signature will be sufficient for withdrawal and/or deposit purposes where any Co-Trustee may sign.
One final note: If you wish to use existing checks on existing accounts transferred to the trust, this is usually okay with the bank, just keep checks the same when you reorder.
See 'Checking Accounts and Automobiles' below for further information.
Sole Proprietorships: Self-employed individuals operating as sole proprietors are unique since the individual is the business. If you wish the trust to operate the business, then business licenses and DBAs ("doing business as") and fictitious name certificates would be used to show your living trust as the owner. Normally, however, a contingent assignment of business assets to the Trust coupled with a power of attorney affects a transfer of the business property to your trust when the owner can no longer run the business.
The business bank account, however, should be made a P.O.D. account to the trust. This step and an assignment of property to the trustee at death will permit the trustee to take over and dispose of the business of the owner without probate.
Closely Held Corporations: Be sure that transferring your interests to a living trust will not trigger a buy-sell agreement with other owners. (If it does, you can request that the document be changed.) If you put your small business stock in your trust, the appropriate corporate records will then need to be prepared to permit transfer title of the stock to the trust. Share certificates will also need to be re- registered in the name of your trustee. See the discussion below entitled 'Privately Held Stock'.
Buy-Sell Agreements: As long as there is nothing in the agreement that prohibits it, a buy-sell agreement can be assigned to your trust (by using an Assignment).
Subchapter S Corporations: With a subchapter S corporation, both the earnings and any losses of the corporation are passed through to the owner(s) personally. Earnings are taxed only once at the personal level and any losses can be deducted from ordinary income.
Transferring subchapter S corporation stock to your living trust does not cause any change or any problem while you are living. After you die, however, the stock can stay in your living trust for a limited period of time, usually up to two years -- after that, it may lose its "S" status and become a "C" corporation. Two years is usually plenty of time to distribute the stock to the beneficiaries so the "S" status can be retained. If you do not want your beneficiaries to receive the stock outright, the tax code also allows it to be transferred to other trusts that meet its qualifications to retain the "S" status. We recommend you discuss this with your accountant.
Limited Partnerships/Limited Liability Companies (LLC): If you are involved in a partnership or limited liability company, your interest can be assigned to your trust. This probably will not disturb the existing agreement or affect your partners in any way, but you should check the partnership agreement or LLC organization agreement to be sure.
The general partner or managing member of the LLC may already have a form to assign your interest to your trust. If not, we can prepare one. The Assignment should identify your interest that is being transferred, how the interest should be titled, and that the trustee accepts any liabilities as well as benefits. The Assignment to the general partner or managing partner with a letter instructing him/her to make the transfer in the records of the business other documents may need to be prepared to complete the transfer in physically-owned partnerships or LLCs. You may want to give the general partner a limited power of attorney to sign the other documents for you (they may charge a fee to do this).
General Partnership Interests: This transfer is handled in the same way as a limited partnership. Your assignment will probably need to be notarized, and many agreements generally include provisions that the other partners consent to it. The partnership agreement requires you to send the Assignment to the other partners or general partner to sign (as verification of their acceptance) and return the Assignment to you. If you are using a corporate trustee with your trust, it may not be able to serve as a general partner. A special trustee may have to be appointed instead.
CHECKING ACCOUNTS AND AUTOMOBILES
Two assets which we generally recommend not be held in the name of the Trust are a regular joint 'household' checking account and automobiles. This recommendation would not apply in those situations where very large amounts of funds are held on an ongoing basis in a checking account, nor would it apply in the situation where you are buying a new vehicle of high value or the automobile is not primarily a transportation vehicle but is an antique or automobile which has unusual value. These assets should be put in the trust. (If you do title a vehicle in the name of your trust, don't forget to notify your insurance company so they can change your policy to reflect the change of ownership and list the trustee as an additional insured. Your insurer may request a copy of the new registration and a letter of instruction from you.
For normal 'household' checking accounts and vehicles used on an ongoing basis by a married couple, the title can be held in joint tenancy form with survivorship. This can normally be accomplished either by having the document title read in both names with the phrase "Joint Tenants with Right of Survivorship" (JTWROS) included after your names or, in the alternative, simply by having an "or" between your names. Either of these are generally accepted joint tenancy forms. An individual bank account or savings account not in the trust where joint title is not desired or available can be "left" to a trust by using a POD ("payable on death") designation. Ask your bank representative for a POD designation card and for you to sign and use the "Trustee(s)" beneficiary designation you use for life insurance policies to name your POD beneficiary. See the 'Letter of Instruction' for specific POD language.
When a joint Trust is signed, it usually includes an Assignment of Untitled Tangible Personal Property document, transferring your personal property including furniture, furnishings, and personal effects to the Trustees of your Revocable Living Trust. This assignment will cover most assets of a personal nature. However, if you own a collectible asset of significant value such as a coin collection, unusual art, and so forth, it may be appropriate to make a specific assignment of the object or collection to the Trust. The issue is really one of making sure that there is clear identification of an asset that has unusual value. Therefore, it would be helpful that the interests which you may have in collectibles either be described in detail in writing and/or schedule a discussion with us to ensure that a thorough analysis of what options are available.
It is absolutely imperative that you place with your Trust document a letter or memorandum indicating how you wish your tangible personal property to be distributed upon your death. I would suggest you make a statement that if you intend it to be distributed to your spouse, if surviving, say so, otherwise spell out what is to go to other beneficiaries. You may be specific as to specific items, or you may simply make a statement that it should go to your children in equal shares. Place the statement with your trust; failure to specify disposition of tangible personal property may result in disputes among beneficiaries or adverse tax consequences to your heirs.
The only transfers that are to be made to a Revocable Living Trust are assets, not liabilities. Debt that has been incurred by the family is not transferred to the Trust; however, the provisions are included in your trust to permit the transfer of certain assets with the debt attached. Otherwise, just debts outstanding at your death can be paid in the Trust if not paid by your estate or from another source. There are also trust provisions in trust to charge your 'loans' to a beneficiary to the beneficiary's share. If you want a debt of a beneficiary 'forgiven', let us know.
Certificates of Deposit. If you have certificates of deposit (CDs), we recommend they be retitled in the name of the Trustee(s). Discuss this with the same individual handling the transfer of any other type of bank asset to the Trust. You need not cash a CD in to do this. However, you should be careful to ascertain from the financial institution that the change of names on the asset from you as individual(s) to yourself as Trustee(s) will in no way adversely affect the interest being paid on the investment. On a rare occasion, we have found that such a change may cause the bank to threaten some form of forfeiture. This should not happen, but if your bank insists on a penalty, we recommend you leave the CD in your name and change the beneficiary of the certificate (POD) to your trust, and use an Assignment to transfer your ownership interest to your trust. We can prepare an assignment form for you. Then, when the certificate matures, you can retitle it to the name of the Trust to insure that there is no financial loss because of change of title. If the institution is not cooperative, you may want to consider moving your funds elsewhere.
Stocks, Bonds, and Mutual Funds. In the transfer of either stocks or bonds to your Trust, a different procedure will be used for privately-held stock to that used for publicly-traded stock.
Privately-Held Stock or Bonds: The transfer of privately held security instruments, such as stocks and bonds in privately or closely held corporations, can be accomplished simply by having new stock certificates prepared in the name of the Trust and surrendering the prior stock certificates. Retitle the new certificates in the name of the Trustee(s) as shown in our instruction letter. This does not require a permit from a state agency, nor normally does it have adverse tax consequences. In the event that the secretary of the corporation has any problems with this transfer, please have that individual contact our office. We can provide specific instructions to transfer your stock to your trust.
IMPORTANT: Certain small business stock may not be appropriate to transfer into your trust if you anticipate significant losses from the investment. For example, an investor can deduct capital losses from the sale or exchange of stock only to the amount of capital gains realized, plus $3,000. However, when an individual has a capital loss on Section 1244 (IRC) stock, up to $50,000 ($100,000 if married) of the capital loss is treated as an ordinary loss and can be deducted from all income. This advantageous tax treatment is not available to stock held in trust. Also, certain professional corporation (PC) stock cannot, by law, be held by a Trust or any other non-professional stockholder.
Publicly-Held Stock: We strongly encourage you to use a broker account in the trust name as a depository for your stocks, bonds, and mutual funds. If you have possession of actual stock certificates and securities, we suggest you set up an account at a brokerage firm in the name of the Trustee(s). The broker can take possession of the instruments and transfer the title to your certificates to the name of your Trust and hold the stock for you in a "street" account. This way, you do not have to worry about misplacing or losing them in a fire, or making trips to your safe-deposit box when or if you trade. You will get a monthly statement showing the status of your stocks. This will save a great deal of work, give you a combined monthly recording of your transaction and the value of your investment and make life a lot easier for your Successor Trustee.
If, however, you insist on keeping the actual certificates in your possession, you will need to have new certificates issued in the name of the Trustee(s). The original stock (or bond) certificate will be surrendered. Our office has a sample "Stock Power and Assignment" which can be completed and sent to the corporation's stock transfer agent along with the certificates to re-title them to your trust. The stock transfer agent is the organization that is authorized to transfer title on stocks and bonds. Call the company and ask who their stock transfer agent is. (For bonds, the transfer agent is usually the institution from which you receive payments on the bond.) On stock certificates, do not rely on the name of the transfer agent on the certificate -- it may be outdated. A broker will be able to assist you in determining who the transfer agent is. Send the transfer agent the stock by certified mail instructing them to issue new certificates in the name of your Trustee. Our Certificate of Trust and the stock power properly signed. Your instruction letter must be signature(s) guaranteed by a bank officer or broker. Insure your stock(s) for 2% of the market value. That is what it costs to replace lost certificates. Make sure you keep copies and check the new certificates as soon as you receive them. We can provide you a sample Letter of Instruction to send to the stock transfer agent.
If you have lost a stock certificate, contact the transfer agent and request an "Affidavit of Lost Certificate and Indemnity Agreement". Complete and sign the affidavit, follow any instructions to furnish bond and return to the agent.
If you decide on opening a broker account, give the broker a copy of our attorney Certification Letter. You need not be concerned if the broker (or those institutions issuing stocks and bonds) does not use the exact words that we have recommended in the letter. For example, brokerage firms commonly use the designation "U/A" representing "Under Agreement" in place of "U/D/T" or "U/T/A" as we may have recommended. This is simply a change in style and should have no adverse consequence. Some include the name of the trust itself as well as the name(s) of the Trustee(s). However, it is very important that the date of the trust be shown on your account. If the designation that your broker insists upon using does not seem to be within the general parameters of what has been recommended, our office should be contacted for appropriate advice.
Mutual Funds/Dividend Reinvestment Accounts: If you have purchased mutual funds or have a stock dividend reinvestment account, it may only be necessary for you to provide a copy of the Attorney Certification Letter and the Instruction Letter. This should satisfy their requirements. Call the toll-free number listed on your last statement and ask for directions for placing the fund into your trust (some have their own form). If they request that you send a Letter of Instruction -'“use the sample form we have given you.
As we previously stated, we recommend holding stocks, bonds, mutual funds, and dividend reinvestment accounts in a single broker account in the name of the Trustee(s). This is far simpler than retitling individual stocks, bonds, and mutual funds, and most brokerage firms provide this service at NO charge to you.
LIFE INSURANCE DESIGNATION
We recommend that the Trust be named as beneficiary of all existing life insurance policies owned by you. The Beneficiary designation to a Trust is different (since the original trustee may have died) and should read:
Trustee(s) of [Name of Trust]
U/D/T (or U/T/A) dated [date of Trust Agreement]
This same designation may be used on any asset requiring a beneficiary designation such as a POD or TOD account or in special cases where an annuity, pension plan, IRA account, is to be payable to the Trust. Naming a Trust as beneficiary of an IRA, 401k, or 403b Plan requires special planning. If you anticipate buying additional insurance, please ask us about the advisability of using an irrevocable life insurance trust to avoid estate taxes on the proceeds.
OIL, GAS, AND MINERAL RIGHTS
Oil, gas, and mineral rights are often the most troublesome of assets to transfer to a Revocable Living Trust. The reason, depending on the location or depending on how the assets came into existence, is that they may be treated as an interest in real estate or an interest in personal property. Only through an examination of the documents of title is it possible to determine the exact method by which such right should be transferred to the Trust. Accordingly, a copy of the document of title should be provided to our office for review and preparation of the necessary assignment document. This document would correctly reflect the jurisdiction in which the interest is located as well as the form in which it must take after it is determined whether the interest is in the form of real estate, in the form of personal property, or in a mixture of the two.
PROMISSORY NOTES AND DEEDS OF TRUST
If you have "owner-financed" the sale of assets or loaned someone money, or have any other debts or notes payable to you, you will need to assign these obligations or notes/loans to your living trust by an Assignment (which we can prepare) or by endorsing the Note(s) over to the Trustee(s). If you hold such mortgages/loans, you should provide us with a copy of the debt instrument, along with any security documents (Deed of Trust or Mortgage) so that an appropriate transfer can be made with any accompanying documents which may be required under state law.
The Assignment of Mortgage is signed by you, notarized, and attached to the original document. If an original mortgage was recorded, we can record the Assignment. However, a note can be endorsed directly to the Trustee by writing on the Note:
"Pay to the Order of _______________________________, Trustee(s)
U/D/T (or U/T/A) dated 00/00/1999"
Date Signature of Noteholder(s)
REAL ESTATE (Your Personal Residence)
Transfer to Trust. We generally recommend, particularly with joint trusts, that your personal residence be put into your Trust. This is a simple process in which you convey your interest in your home to the Trustees of your trust by a Deed of Grantor(s) to Trustee(s). The deed will transfer the property as it is now titled (before it is put in the trust) from you, the Grantor(s), to the Trustee(s) of your trust. The Deed will contain the legal description of the property. We then record the deed with the appropriate Clerk of Court for a nominal recording fee. In most states, no transfer tax is assessed when putting your real estate into a living trust. This transfer does not constitute a sale, but merely a retitling of the property. Effective July 1, 1995, Section 58.1-811(A)(12) of the Code of Virginia, 1950, as amended, specifically exempts the transfer of real property into a trust from transfer taxes, therefore, only the recording fee (usually $17) will be collected.
If your home has not already been transferred to the Trust, then provide us a copy of the deed to your home so that we may obtain the legal description for preparation of the deed for your signature(s). If you bring the original deed by the office, we will make a copy for our files and return the original deed to you.
Splitting Your Title To Your Home: With individual, single trusts for a married couple, your joint interest in your personal residence can be split into two shares by the use of a tenants-in-common deed. This means a husband and wife would each own a one-half interest in the property. Upon the death of one of you, a one-half interest of your Virginia real estate would pass under the decedent's Pour-Over Will into the deceased Grantor's trust by the terms of the trust. Using a tenants-in-common deed keeps the property of each owner separate for estate tax purposes. The deed will need to be recorded in the Clerk's Office in the appropriate city or county to document the transfer of the decedent's one-half undivided interest to the trust upon death. The Will, once recorded with the Clerk, serves as a deed for this purpose.
If the Clerk of Court attempts to assess a probate tax on the value of the one-half interest in real estate passing to the trust (presently the tax is $1.00 per $1,000), this tax should not be paid. The Will permits the Personal Representative to sell the real estate under Section 64.1-57. The Clerk may assert that because the estate can sell the real estate, the Clerk can claim it is "in the estate" for probate tax purposes and assess the tax. The Personal Representative, however, may disclaim that power to sell and therefore avoid that tax. If this needs to be done, call us immediately. The probate tax is a nominal tax, but if it should become significant, you may want to avoid the tax by disclaiming the right to sell property as Executor or Personal Representative. To avoid this step, the undivided one-half interest I the property may be deeded directly to the trust or each owner.
Creditor Rights. One caveat. Property held by married couples jointly as tenants by the entireties with right of survivorship is not subject to the individual debts of one of the owners. This protection from individual creditors of one of the owners is no longer available when title changes to a joint trust or when title is converted to tenants in common. In this case, a creditor can pursue the debtor's one-half interest in the property.
Loans Against Your Home: You should know that if there is a mortgage or deed of trust loan on your residence, transferring the property to your Trust will not accelerate payment of the loan to the lender under a "due on sale" clause in the loan documents. Acceleration on any outstanding indebtedness on your personal residence by virtue of a transfer of title to a Revocable Living Trust is prohibited under federal law. This rule, however, does not apply to investment property that is not used as your residence.
Insurance: Since you are changing the legal title to real estate when you put real estate into a trust, you should notify the company insuring the property against fire or other loss (usually a homeowners' policy) of the transfer of title to your trust and naming the trustees as additional insured
REAL ESTATE (Other than Personal Residence)
If you own real estate other than a residence, the same procedures for preparation of a deed, signing, notarization, and recording would be followed. However, if there is an existing indebtedness on the property, it will be necessary to contact the financial institution holding your note under a mortgage or deed of trust to obtain permission for the transfer to the Trustee(s). Past experience suggests that this is not a practical problem, however, failure to obtain prior approval could result in acceleration of your loan and require you to pay off the debt under the "due on sale" clause. Therefore, if we are to prepare a deed to the Trust of the real property we will need a copy of your present deed, the lender's name, address, and loan number for any lenders that you may have so that we can request the lender's approval.
In addition to providing us with an actual copy of the deed and lender information where appropriate, please also provide a photocopy of the most recent tax bill from which the necessary information from the county/city Treasurer's or Assessor's office may be obtained. Most localities are now requiring some form of identification such as a tax number or billing address on the deed. Once the transfer is made, it will be necessary to advise your insurance agency of the change in title.
If your other real estate is rental property, the passive activity loss rules prohibit a tax deduction for losses in excess of income from the property. An exception is made, thus permitting the deduction, for persons who have an adjusted gross income under $150,000. However, trusts cannot claim this exception after the owner's death. As a result, if you own rental real estate, and are exempt from the passive activity loss rules and are taking deductions for losses from the property, you should discuss with your CPA or accountant whether the property should be placed in trust.
RETIREMENT & PENSION PLANS (IRA, 401(k), Profit Sharing and Keogh/TSAs)
While we generally recommend that all titles and beneficiary designations should be changed to your living trust, there are a few assets that should not be placed into your living trust. These are qualified retirement and pension plans: IRA, 401(k), Pension, Profit Sharing, Keogh Plans and Tax-Sheltered Annuities (TSAs). These are tax-deferred plans, you did not pay income taxes on this money when the contributions were made. The income taxes are deferred until you withdraw the money at a later time; ideally, at your retirement when your income (and tax bracket) is lower. Withdrawal usually must begin by April 1st after you reach age 70-1/2; sooner or later, the income taxes must be paid.
In those situations where you are covered under a corporate or individual pension plan, Keogh plan or a traditional IRA, we recommend that the primary Beneficiary be your spouse (if married) and that a child/children or other individual be named as a contingent Beneficiary. Normally, the trust should not be named the primary beneficiary of these plans. However, if the Trust is to be named as the contingent Beneficiary, the same name should be utilized as has been recommended for the designation of the Trust for life insurance purposes. Because of the tax implications of naming the Trust as beneficiary, you should discuss this decision with your CPA, tax advisor, and our office. For example, if you name your living trust as the beneficiary, there are some tax disadvantages. A living trust is not entitled to the rollover option, as a spouse is, so income taxes must be paid when the proceeds are paid to your trust (after you die). Because of this, many people name their spouse as the first beneficiary, and their child/children as secondary beneficiary(ies). However, if you have children from a previous marriage and are concerned that your spouse may be too easily influenced by others after you're gone, or you simply have another reason why you may not want a spouse to have these proceeds, there are some other options you may want to consider, such as naming a special Irrevocable Trust, a Q-TIP trust (C trust) or a Charitable Remainder Trust as beneficiary.
Anytime you name someone other than your spouse as the beneficiary, you need expert advice. Existing laws on distributions from traditional IRAs and qualified plans (401k, etc.) are complex and these laws can change. You will need to discuss these options with someone who is experienced in this area, especially if you have large accumulations in these plans that may be subject to excess accumulations or both income and estate taxes. On taxable estates, income, estate, and other taxes could take up to 75% or more of your tax-de