FUNDING INSTRUCTIONS FOR REVOCABLE LIVING TRUSTS
F. Stephen Glass
Glass Law Group, PLLC
201 W. Chatham Street, Ste. 110A (Cary Innovation Center)
Cary, North Carolina 27511
In order for your revocable living trust (“RLT” or “trust”) to meet your estate planning goals, it is critical that your assets be titled in the name of your trust. This important process of transferring the title of your assets into your RLT is known as “funding” your trust.
The funding instructions that follow are presented to help you determine what assets are appropriate for ownership by your trust and the best methods for transferring different types of property into your living trust.
As you deal with buying, selling, and conveying your RLT assets, you may wish to accomplish many of the funding tasks yourself. However, it is important that your funding be accomplished in a precise and legally correct way. Therefore, we caution you to utilize our services any time you have any question or concern about the transferring of an asset to, or from, your RLT. In general, we will be delighted to review all potential transfers of real estate, limited or general partnership interests, promissory notes, oil and gas interests, and business interests.
HOW TO FUND YOUR TRUST
The following information explains some of the procedures for transferring assets from your name(s) into the name of your RLT. As a general rule, all assets should be titled in (or transferred to) your trust, using the exact name of your trust:
“John J. Smith and Barbara S. Smith, Trustees, or their successors in trust, under the John J. Smith Revocable Living Trust, dated February 20, 2008, and any amendments thereto.”
Usually, the primary purpose of transferring your assets into the name of your RLT (or to make your trust the beneficiary) is to avoid probate at death. Assets actually owned by your trust will also avoid “Living Probate;” that is, should you become incapacitated and require a formal Guardianship procedure, the assets can be managed or sold by your successor trustee for your benefit without the necessity of having a Guardian appointed by the court.
A secondary reason, although in some situations even more important, is to assure that your assets will pass through your trust to achieve your planning objectives, including estate tax reduction and the distribution to your intended heirs.
As Grantor and Initial Trustee, you will continue to control your assets just as you always have. Transferring your assets is not complicated, but you should follow these procedures to take full advantage of your trust.
The most efficient means of making transfers to your RLT is to write the institution which holds your assets and request the necessary forms.
Some transfers will require our assistance, for example, those transfers requiring deeds. If you wish, we will assist you in transferring any of your assets to the name of your RLT. We reserve the right to charge you for any additional time at our customary rates. If you change the titles yourself it will be your responsibility to ascertain that such assets are properly titled.
When you acquire property in the name of your RLT or sell property already titled in your RLT’s name, evidence may be required as to the identity of the trustees having authority to sign deeds or other legal documents on behalf of the trust. A Certificate (or) Affidavit of Trust can be used to avoid providing a complete copy of your RLT. That certificate or affidavit is all that is required to show the authority of the trustee or trustees. There may still be instances in which the entire trust agreement (or extracted provisions) may be requested in connection with a business transaction, but generally the trust affidavit is all that will be required.
1. Personal Property: All personal property, such as furniture and jewelry, should be put into the trust in order to keep your these assets out of Probate. Under North Carolina law, an estate worth more than $10,000 must be probated. Most likely, just your furniture alone would add up to more than $10,000. Thus it is important to assign all personal property to your RLT.
2. Bank Accounts: Checking accounts, savings accounts, and certificates of deposit may be titled in the name of your trust. The ownership of your account is determined by what appears on the signature card on record at the bank. You may wish to request that your name, and not that of your trust, be printed on your checks. This will not affect the ownership of the account. Also, you can request that you be permitted to sign your name without the word “trustee”.
It is often desirable to have at least one personal checking account which is not in the name of your RLT. If you retain a checking account in your name and a “Pay on Death” (POD) designation is valid in the state in which your bank has its main office, then you should provide a POD designation to the bank. Any balance remaining in the account at the time of death will automatically be transferred to your trust.
Such a designation is, of course, revocable by you at any time. Your bank will provide a card on which the Pay on Death designation can be made.
3. Credit Union Accounts: Many credit unions do not allow trust accounts, only individual accounts. If possible, you should use the POD designation on these accounts. Although this POD designation will avoid death probate, these assets will not avoid living probate (Guardianship) unless the trust is actually the owner. To reduce the likelihood for living probate you should limit the amount on deposit or invested in accounts that are not registered in trust name. Your Credit Union will in most cases provide a POD designation card for your signature.
4. Certificates of Deposit: Some institutions insist that when an account name is changed, an interest penalty for early withdrawal is due. You should be sure that there is no interest penal before retitling a CD in the name of your RLT. If there is a penalty, wait until maturity and then renew under the RLT name.
5. Real Estate: When deeding existing real estate to your RLT, the form of deed to be used is very important. If you own real estate in just your own name in other states upon your death, ancillary probate will need to be opened in each state. Accordingly, it is very important to create and sign accurate deeds to transfer title to your RLT. We will assist you with the preparation of proper deeds.
A. Mortgages – Before transferring property to your RLT, or at least before recording the deed, you should ascertain that your mortgage does not have a due on transfer clause which might be triggered by such a transfer. Most major lenders are familiar with RLTs and seldom object to such a transfer. However, private lenders holding low interest rate loans have been known to object, and their written consent should be obtained.
There is no need to transfer the “mortgage” on your property – or any other debt for that
matter – to the name of your trust. You remain liable on the promissory note and the lender will generally want to send all statements and other correspondence directly to you.
B. Future Purchases – When purchasing real property, ask the seller to deed
The property to your RLT. If you wish to sell real estate which is owned by your RLT, you can
provide a deed to the purchaser as trustee for your RLT (called a “Trustee’s Deed”) and record
the deed and the Affidavit of Trust at the time of the sale; or you can transfer the real property
from yourself as trustee to your own name and then to the purchaser by warranty deed.
C. Interest Deduction – Trust ownership will not alter the tax deductibility
Of home interest and taxes, nor will it affect your $250,000 [jointly, $500,000] capital gains
exemption upon the sale of your home.
D. Property/Transfer Tax – Transferring your property to your RLT
Generally will not result in a reassessment of your property for real estate tax purposes, nor will
it trigger any transfer tax or documentary tax. If you are receiving a reduction in your taxes
because of a disability, veteran’s or other exemption, you should discuss this with the tax
assessor to be sure that the recording of the deed will not eliminate your eligibility for the
E. Deed Recording – An issue which frequently arises is whether to
immediately record deeds conveying property to your RLT. By recording immediately, you avoid the risk of subsequent destruction of the deed. Often, however, it is acceptable to hold the executed deeds and record them only when needed. For instance, if you intend to sell or refinance the property in the near future, or if your mortgage has a due-on-transfer clause, it may be advisable to hold the unrecorded deeds.
F. Refinancing – If you refinance your property, your lender may require that
you first transfer the property from your RLT back into your own name, but should permit you to retransfer the property to your RLT after the refinancing is completed. Always ask if the lender will permit this, so as not to trigger a due on transfer penalty.
G. Joint Tenancy – Assets owned in joint tenancy pass to a surviving joint
tenant and do not pass in accordance with your trust or pour-over will. This could negate tax planning and dispositive provisions of your RLT. Joint tenancy does avoid probate, but only on the first death of the joint tenants.
H. Home Owners’ Insurance – It is important that your RLT be identified as an additional insured on your home owners policy.
6. Safe Deposit Box: You should consider transferring your existing safe deposit box to the name of your RLT so that upon your disability or death, your trustee will have access to the documents kept there. We typically provide in the RLT agreement that the contents of any safe deposit box are transferred to the RLT.
7. Retirement Plans: If you have death benefits under a pension or profit sharing plan, an IRA, a 401(k) or other such plan, the proper beneficiary of the plan should be carefully considered. CAUTION: If the assets of such a plan are transferred to your RLT while you are alive, such a transfer may be treated as a taxable withdrawal. Consequently, there may be income and estate tax conflicts in making the choice of the proper death beneficiary, and you should seek professional advice before naming your trust as beneficiary.
If you decide to take advantage of any spousal rollover provisions that may be available under the plan, you may wish to designate your spouse as primary beneficiary and your trust as contingent beneficiary.
While many individuals are diligent about preparing their RLTs, they may give little consideration to selecting an IRA or 401(k) beneficiary. IRAs and 401(k)s often are significant portions of a person’s assets. There are many considerations and options to naming primary and contingent beneficiaries of your IRA or 401(k), each with its own advantages and disadvantages.
If you name your RLT as the beneficiary of your IRA or 401(k), there are several specific and complex rules that need to be observed. The terms of your RLT agreement must contain certain provisions to accomplish your goals. Therefore, it is critical to review IRA or 401(k) plan beneficiary designation forms in light of your total estate plan.
When you open up an IRA or begin participating in a 401(k), you are given a form to complete in order to name your beneficiaries. Changes are made in the same way – you complete a new beneficiary designation form. A will or trust does not override your beneficiary designation form. However, spouses have special rights under federal.
Naming Your Spouse As Beneficiary.
When it comes to taxes, your spouse is usually the best choice for a primary beneficiary. A spousal beneficiary has the greatest flexibility for delaying distributions that are subject to income tax. In addition to rolling over your 401(k) or IRA to his or her IRA, a surviving spouse can decide to treat your IRA as his or her own IRA. This can provide more tax and planning options.
If your spouse is more than 10 years younger than you, then naming your spouse can also reduce the size of any required taxable distributions to you from retirement assets while you’re alive. This can allow more assets to stay in the retirement account longer and delay the payment of income tax on distributions.
Although naming a surviving spouse can produce the best income tax result, that isn’t necessarily the case with death taxes. One possible downside to naming your spouse as the primary beneficiary is that it will increase the size of your spouse’s estate for death tax purposes. That’s because at your death, your spouse can inherit an unlimited amount of assets and defer federal death tax until both of you are deceased (note: special tax rules and requirements apply for a surviving spouse who is not a U.S. citizen). However, this may result in death tax or increased death tax when your spouse dies.
Naming Your RLT As Beneficiary.
Many estate planning professionals recommend that you create or name your RLT as beneficiary for an IRA. There are only a couple of reasons to consider naming your RLT as a beneficiary. One of the great things about IRAs is that your children can inherit them, and they do not have to cash the account in right away. Rather, they can stretch the tax deferral of that IRA across their lifetime. This is known as a “stretch IRA.” Then, every year starting the year after the parents have passed away, this child has to take a small amount out, based on his or her life expectancy. The idea is he or she can stretch the benefits of that account across the rest of his or her lifetime, which will effectively lower the tax bracket and maintain that tremendous triple compound interest you get with tax deferral.
One problem is the “living” part of a RLT. In order to qualify for a stretch IRA and maintain that tax advantage while not being subjected to a tax burden, you must have a life expectancy. A living trust has no life expectancy that can be measured. So most living trusts do not qualify for a stretch IRA.
There are reasons to use a RLT as the beneficiary, but they are very, very specific. Making your RLT the beneficiary is not a one-size-fits-all solution when you are leaving money to your children. A primary reason is to provide restrictions on the account so the children cannot cash the account in all at once.
Naming your RLT as beneficiary of a retirement account is much more complicated than it may seem. If done incorrectly, naming a trust as beneficiary could expose you to tax penalties, an unplanned tax bill for your heirs, and loss of the tax structure of the IRA or 401k. Here are some guidelines to follow when naming a trust as beneficiary for your retirement accounts:
Should you name a trust that holds or will inherit other assets? A separate trust should be set up to handle distributions from your IRA or 401k upon death. Because retirement account assets have a complex set of rules for distribution, mixing them with other assets creates a greater likelihood that mistakes will be made, and these mistakes can trigger high taxes on the account. It is best to use a separate trust to inherit the IRA-type accounts. If you have multiple beneficiaries, it is usually best to name a separate trust for each beneficiary.
Is the trust properly named as beneficiary for your IRA/401k? The beneficiary form holds complete control over the ultimate distribution of your retirement account. Be sure that you comply with your IRA or 401k custodian’s rules, and be sure to keep a copy of the beneficiary form for your records.
Should you have the retirement account balance transferred to the trust upon death? Having the balance paid to your trust at death will trigger all of the income taxes on your retirement account. Instead, the retirement account should be re-titled as an inherited IRA for benefit of (fbo) the trust. Required Minimum Distributions are then paid to the trust annually, and are ultimately distributed according to the rules in the trust.
8. Life Insurance and Annuities: At a minimum, change the beneficiary designation of any insurance policies you own, including group life policies with your employer, so that the death benefit will be payable to your RLT. You may wish to transfer “ownership” of the policy to the trust if the policy has or will have significant cash values which may be needed in the event of incapacity. If a policy on your life is owned by your spouse, you should change both ownership and beneficiary to your RLT. Contact your agent or the insurance company directly to obtain the necessary forms to effect this change.
At such time as your estate (including all retirement plans and death value of life insurance) approaches $3.5 million if you are single, or $7 million, if you are married, you should consider placing (or replacing) life insurance in an Irrevocable Life Insurance Trust. This trust is designed to remove the proceeds entirely from your estate and could remove it from your spouse’s taxable estate.
9. Automobiles: Although your personal automobile can be titled in the name of the trust, some grantors of RLTs prefer to leave this asset outside the trust. Under North Carolina law, assets such as automobiles can be transferred without probate proceedings if the value of entire estate does not exceed $10,000. That means that all assets owned in your name and not in the name of your trust cannot exceed $10,000. Therefore, expensive automobiles and motor homes probably should be transferred to your trust. If you decide to put your automobile in your trust, you should first consult with your insurance agent to ascertain that this will not result in a business rating and increased insurance premiums. Also, be aware that the Department of Motor Vehicles charges a fee for the change of ownership.
10. Promissory Notes: If you have existing notes payable to you personally, they should be assigned to the trust, and the party making the payments should be notified of the assignment with the request that future payments be made to the trust. If the notes are secured by real estate through a mortgage or deed of trust, you should complete, sign and file an “Assignment of Note and Deed of Trust”. This assignment may be necessary to avoid probate should a “Release of Deed of Trust” need to be signed after the death or incapacity of one of the payees. Our office can prepare these documents for you, if desired. If you loan money to anyone in the future, or if you sell property and the buyer gives you a note for the purchase price, have that person execute the note with your trust as the payee.
11. U.S. Government Bonds: These, too, should be transferred to your trust. Series B, BE, and H bonds can readily be transferred to a revocable living trust without causing any of the accrued interest to be currently taxable to the owner.
12. Registered Stocks and Bonds: If you have a large number of certificates in different issuers, or if you buy and sell securities on a frequent basis, the simplest way to transfer title to your trust is to establish a “street name” account with your broker. In this type of account, the broker holds the certificates as custodian and collects all interest and dividends on your securities. Your ownership, transactions and income are all reported to you on periodic statements, including a year-end statement for your income tax return. Such an account eliminates considerable paper work in managing your portfolio and as well as eliminating the need to provide a trust affidavit or other documentation every time you sell a security. The street name account should be registered in the name of your trust.
If you do not use a street name account, when you purchase registered stocks, bonds, or mutual funds shares, simply tell your broker to have them titled in the name of your trust. The taxpayer identification number to be used is your Social Security number. Your broker may want to see a copy of your trust agreement. If a stock transfer agent wants information regarding the trust, it is usually acceptable to provide them with copies of only the Articles listed on the Affidavit in your portfolio. In some instances, the Affidavit of Trust alone is acceptable.
The sale or transfer of stock or bond certificates which are titled directly in the name of the trust is accomplished by signing the full trust name either on the stock certificate or on a separate stock power.
13. Unregistered Bonds: Bearer bonds, such as municipal bonds and unregistered treasury Bonds, must be assigned by a separate assignment which should be attached to the bond.
14. Professional Corporation Stock: If you own stock in a professional corporation or professional limited liability company, the law of North Carolina and of most states require that the stock be registered in the personal name of the practitioner. Additional planning may be necessary to avoid the probate of this stock.
If the stock is subject to a buy-sell agreement with the corporation or with other professional shareholders, you should consider having the buy-sell agreement provide for the purchase price to be paid to your trust at death.
15. S Corporation Stock: The income tax regulations have strict requirements with regard to shareholders in an S Corporation. Although the general requirement is that such shareholders can only be individuals, IRS regulations clearly provide that this type of stock can be held by a revocable living trust. In addition, your trust can continue to hold this type of stock for two years following your death.
16. Stock Options: An employee who receives an incentive stock option (ISO) is not generally taxed at the time of the receipt or exercise of the option. However, there are some very complicated rules with regard to the transfer of the option or any stock that is acquired by exercise of the option. Accordingly, neither qualified stock options nor, for a period of at least two years after acquisition, stock acquired under a qualified stock option plan should be transferred to your RLT.
17. Partnership Interests: Any existing partnership interest should be assigned to your RLT. Examine the partnership agreement first to determine if the consent of the other partners is required for the transfer to be effective. Any interest which you later acquire in a general or limited partnership should be taken in the name of your RLT. The trust would become the new partner.
Income Tax Matters: You should continue to use your social security number for tax reporting purposes on all trust assets, just as you did when you were the direct owner, and to report all income on your own Form 1040. Any financial institution which requests a “Federal Employer I.D. Number” should be informed that you are not required to obtain one and, moreover, you are REQUIRED to use your social security number for tax reporting purposes per IRS Regulation 671-4(b).
Following the death of one spouse, the successor trustee will need to obtain federal tax ID numbers for both the Family Trust and the Marital Trust.
Small Estates/Collection by Affidavit: The North Carolina Probate Code creates a simplified system of transferring assets by affidavit when the net value of a decedent’s personal property is less than $10,000. Therefore, it is possible to keep certain assets (e.g. less expensive automobiles) in your personal name rather than in the name of the trust. You should closely monitor the value of assets outside the trust to ascertain that you do not exceed the small estate limits.
Keep in mind that one of the goals of your estate plan is to avoid probate and the resulting delays and expenses. To fully attain that goal, you should make every effort to properly title all of your assets to be transferred to your RLT.
If you have any questions regarding the funding of your trust, please feel free to call us 919.948.7633.