Funding Your Living Trust

An Overlooked Component of Estate Planning

Once a living trust is established, then specific steps are taken to either fund the trust, or otherwise to utilize beneficiary designations so that property will pass outside of probate. A misperception exists that everything you own should be transferred or retitled in the name of the trust. An attorney will properly guide you through the funding process, and you will learn that one does not blindly toss all the assets they own under the name of the trust. A knowledgeable estate planning attorney will also educate you on how beneficiary designations can be used. They are used in conjunction with your trust to achieve your objectives for distributing your estate without probate.

This discussion represents a guide outlining steps to ensure that a living trust functions as intended. In some instances, these steps should not be taken, as we have specified below. Since this is merely a guide, an estate planning attorney should be consulted for a proper analysis of the funding of a living trust. Some of the more common assets which attorneys confront when addressing funding issues appear below.

adverse tax implicationsRetirement Accounts

Adverse tax consequences could result from the transfer of certain assets into a trust, such as IRA’s and retirement plans. It is therefore strongly recommended that any such retirement funds or benefits never be transferred into the trust or retitled in the name of the trust.

A very common recommendation for retirement accounts is for the spouse to be named as the primary beneficiary. With second marriages, sometimes a spouse will want to provide for their children of a prior marriage and instead list the children as the primary beneficiary. If you are single, you may designate either your trust or your children or others directly as beneficiary.

It will help if you exercise caution in filling out the change of beneficiary form. Some institutions include a change of ownership section on the same form, and a change in ownership of a retirement account is the last thing you want to do. Nor are you transferring or retitling the retirement account(s) in the name of the trust. You are merely effecting a change of the beneficiary for the retirement account, as described above.

Life Insurance Policies

As to life insurance policies, anyone can be named as beneficiary, and that will avoid probate of the life insurance proceeds even in the absence of a living trust. A living trust does allow much greater flexibility and management over life insurance proceeds. For that reason, it can be prudent for a revocable living trust to be named as the beneficiary of a life insurance policy. The trust affords extensive protections to any asset that passes through it, including life insurance. As with any asset, there are always potential tax issues, and an experienced estate planning attorney would be an excellent resource.

Certificates of Deposit

If you have any Certificates of Deposit, ask someone at the bank if there would be a penalty for retitling any CD’s into the name of the trust. Some banks treat the matter as a transfer and impose a stiff penalty, in which case you should leave the CDs as is until they mature. If, at the time of maturity, you decide to cash them out, be sure to place the proceeds into an account that bears the name of your trust. If, at the time of maturity, you decide to put the funds into another CD, be sure to inform the bank to title the new CD in the name of your trust.

stock marketStocks and Bonds

Stock and bonds can be handled in a couple of different ways. One option is to request a “Transfer in the Event of Death” form. This way, you can name specific individuals whom you wish to receive the asset upon your death. This will function to allow the asset to pass outside of probate upon your death. Another option is to have the stock registered in the name of the trust. Your investment manager or stockbroker would be an excellent contact for helping you put into place either of these two alternatives.

Tax-Deferred Annuities, Flexible-Premium Deferred Annuities, or Variable & Fixed Annuities (not applicable to tax-sheltered annuities “TSA”)

Usually, the annuitant/owner’s spouse is designated as the beneficiary on a tax-deferred annuity contract, with children named as secondary beneficiaries. If a non-married person owns the annuity, it is best to have natural persons named as beneficiaries. The trust should never be the owner of an annuity contract. The general guiding rule is for only natural persons to be named as beneficiaries under an annuity contract. Otherwise, drastic tax consequences could result, and favorable distribution options (such as the use of a beneficiaries’ life expectancy to stretch out the period for deferral of any taxes) can be lost. A knowledgeable estate planning attorney would be an excellent resource for advice regarding how to best handle annuities with living trusts and estate planning.

Bank Accounts

Any monies in checking, savings, money market, or other bank accounts can be taken care of by going to the bank and asking them to retitle any such accounts into the name of the trust. The bank handles many of these requests weekly, and it is straightforward to do.

Real Estate

Almost all estate planning law firms will prepare and record any trust transfer deed(s). This includes your home and other real property which you own in any state within the United States. A California living trust can hold title to any real property located anywhere in the United States. Call your insurance agent who handles your homeowner’s insurance and ask if they need to have your policy reflect that the home is now in your revocable living trust. It would also be prudent to notify your title company that your property is now in a living trust.

Vehicles, Boats, Trailers

As for vehicles, boats, and trailers, California law is favorable to you in this regard, and there is no need to go to the DMV and re-title any such assets. Except in the rare case of an extremely valuable vehicle or expensive car collection, you can leave the title in your name for any cars, boats, and trailers. Any future vehicle purchases should be in your name.

Licensed to Practice Law Since 1991 in All State Courts in California