7. Funding the Trust & Ancillary Issues Flashcards
The rationale for, and steps to assure, the complete funding of a Revocable Living Trust
If RLT remains unfunded or partially funded, the estate may be confronted with:
-unnecessary probate proceedings
-substantially increased estate taxes
-the possibility that property will pass to unintended heirs
-otherwise unnecessary and easily avoidable litigation
-longstanding and irreconcilable family feuds
All assets that not are not specifically exempted by their terms from probate should be immediately re-titled to the trustee of the client’s Trust, accompanied by a Pour Over Will, and periodic review to ensure funding is complete.
Proper ways to prove or confirm the existence of a Revocable Living Trust
Some jurisdictions or institutions may ask for a copy of one’s Trust documents, and it is reasonable that they may need proof of the Trust’s existence along with the Trustee’s identification before proceeding with a transfer of title or ownership. But that may defeat one of the primary Trust benefits, which is privacy.
Generally, proof can be provided with relevant pages, such as the page with the Grantor’s name, the page appointing the Trustee, the page containing the Trustee’s powers, and the page with the Grantor and Trustee’s signatures. Some entities may require the recording of an Affidavit of Trust or a Certification of Trust, along with the deed or other transfer document.
The special requirements and mechanisms involved in transferring Real Property
When a Grantor wishes to transfer real property to a RLT, a deed is prepared that names the Trustee as the Grantee of the property which is generally recorded on the land records in the city or town where the property is located.
Quitclaim deeds are most often used, but warranty deeds may be used in jurisdictions where the title insurance company threatens the loss of title insurance because of the transfer.
Issues that require special attention when transferring Real Property
Due-on-sale clauses on mortgages are not triggered by a transfer to a RLT as long as it is a residential property with less than 5 dwelling units and the borrower (trustee) retains the right to occupy.
If a client wants to refinance, lenders may require the client to take the property out of the Trust. Once the loan is closed, the property can be transferred back.
Every state has different rules and regulations, so if a client owns property in multiple states, it is best to consult with attorneys in each state who are familiar with local laws and customs.
In some states (i.e., Louisiana), transfer to a RLT may cause the loss of the homestead exemption from creditors, so may not be a good idea to make the transfer until any concerns with creditors are resolved.
General retitling and transfer protocols for Personal Property
Commonly done by way of General and Specific Assignments and Specific Bills of Sale.
Generally, if an asset (tangible or intangible) has a certificate or title issued by a third party indicating that the client is the owner of the asset, that certificate or title should be returned to the third party who issued it with a request that the title by issued in the name of the Trustee.
Transferring title to automobiles or other vehicles
One must sign the title over to the trustee. Most States have a form to apply for registration. The name listed on the registration form must match the name listed on the title. Additionally, the insurance card presented must indicate that the insurance on the vehicle is listed in the name of the trustee.
There are potential fees, so one could wait to make the transfer until next registration expiration date or when they replace the current vehicle. But if the client owns several vehicles that exceed the small estate threshold, death could trigger a full probate.
Boat: most are registered through the various states, either through the DMV or the Department of Natural Resources. Also review any loan and insurance details to ensure RLT is listed.
Airplanes: registered with the U.S. Department of Transportation. To transfer to a RLT, contact the Federal Aviation Administration for the proper info and documents needed to affect the transfer.
Re-titling other tangible personal property
In most cases, a General Assignment of Personal Property will do the job, which is quite easy to execute and will not result in any change of usage or lifestyle.
For unique assets that are not titled (i.e., collections of coins, gold, silver, art, crystal, jewelry, collectibles, etc.), assignments and bills of sale are perfectly adequate. These forms (at the discretion of the attorney) can either describe general categories of tangible personal property or specific valuable items.
Notification of creditors
There is no law that requires the notification of unsecured creditors.
Secured creditors should be notified of the transfer of their collateral to the Trust prior to making the transfer.
Transferring cash accounts
Can usually be transferred with a simple form provided at the institution. They may request a copy of the Trust because they are looking for clear and concise approval language that permits the transfer, but they can often accept any of the appropriate pages in lieu of the entire document.
Transferring investment accounts
Some may simply retitle (similar to protocol with cash accounts), and some may require that a new investment account be opened in the name of the Trust. Call the company first, tell them what you want to do, and let them assist with the transfer procedures.
Transferring stock, bond, and investment certificates
Publicly traded stock, bond, or investment certificates that are in physical possession of the client should be sent to the designated transfer agent for retitling in the name of the Trust.
Insurance and non-qualified annuities
If they are not assets of a qualified plan, they can in some cases by owned by the client’s RLT. Depending on the circumstances, the beneficiaries may remain the same or the Trust may be named as the beneficiary.
Name specific people as beneficiaries of non-qualified annuities, such as a spouse, children, or other family members/friends. Because they have “life expectancies,” they have the opportunity to take the annuity death benefit over their lifetimes rather than as a lump sum. Trusts or charities may be named as beneficiaries, but since they have no life expectancy, the death benefit must be paid out in 5 years.
Make sure a contingent beneficiary is named as well. An individual or entity (think Trust or charity) that has a high likelihood to receive the proceeds many years in the future may be a good contingent choice.
Corporation, LLC, and Partnership interests
The best way to transfer legal entity ownership documents is to formally transfer them on the books of the corporation, LLC, or partnership (i.e., a meeting is held, the old documents are cancelled, new documents are issued naming the Trustee as the owner, and minutes are drafted and signed confirming cancellation, reissue, and transfer).
Installment obligations
Promissory notes are transferred by assignment. The payee signs over the note to the trustee of the RLT. The assignment should be in writing and a copy of the note should be attached. Once re-assigned, the Payee should notify the Maker and instruct them to remit future payments to the Trustee.
Under most State statutes, a mortgage on real property must be assigned in writing, it must contain a sufficient description to identify the mortgage, and it must be executed, attested and acknowledged in the manner prescribed for the execution, attestation and acknowledgment of deeds of land.
Utilizing the RLT as the beneficiary for a qualified plan
Drawbacks include:
1) distributions started sooner and paying out faster than they would if paid directly to the surviving spouse (thereby losing income tax deferral benefits
2) higher income taxes on benefits kept in the Trust and not immediately distributed to beneficiaries, therefore taxes at the Trust’s income tax rate
3) wasting or losing part of the estate tax exemption paying income taxes
Under most qualified plans, spousal consent is required to name a beneficiary other than the surviving spouse.
