As you likely have ready by now on this blog, our firm is a big proponent of utilizing various kinds of trust documents in a well designed Estate Plan. One popular trust used is called the Living Revocable Trust. It is also commonly referred to as a “Lifetime Trust”.
The benefits of placing assets into a trust are numerous, but the biggest advantage is undoubtedly the benefit of not having your family endure a lengthy and expensive Probate process when you die. Quite simply, if you die after only executing a Last Will and Testament, before any money is dispersed from your estate the actual distribution must be approved by a court (In New York City the court tasked with such a matter is the Surrogate’s Court). By using a Living Revocable Trust you can save your family thousands in attorney and court fees after you die.
As I have mentioned in this blog before, the key however is not CREATING the trust, which is done with the help of a trained and specialized Estate Planning Attorney, but rather the FUNDING of the trust. You can have the most well drafted Living Trust in the history of the world but without funding it (placing your assets INTO the trust) it is essentially worthless for probate avoidance purposes.
There are several things to consider when funding a trust, and a smart Estate Planner will guide you through the process along with his trusted network of bankers, insurance agents, and accountants.
In layman’s terms, funding your trust is the actual process of transferring your assets from your own name into your trust. You will need to physically change the titles of your assets from your individual name (or joint names, if married) to the name of your trust. These assets can be almost anything that you can think of, whether it be real estate, cars, bank accounts, investment accounts, etc. You will also change most beneficiary designations to your trust. A trustee is the person charged with the management of the assets, and in this type of trust you will most likely name yourself as trustee, so you will still have complete control. Perhaps the biggest benefit of a revocable living trust is that you can continue to buy and sell assets just as you do now. You get a checkbook and debit card if you like for any bank accounts and you have complete control over the assets during your lifetime. You can also remove assets from your living trust should you ever decide to do so, although be warned that doing so instantly removes the benefits obtained by utilizing the trust mechanism to begin with. If you simply visit an attorneys office, sign your living trust document and don’t change title to property and any beneficiary designations on accounts, you will not avoid probate. Your living trust can only control the assets you manually elect to place into it.
In the event that you DO fail to place an asset into the trust (sometimes intentionally and sometimes not), your attorney will likely prepare what we call a “Pour Over Will” that acts something like a safety net. When you die, the will “catches” any forgotten asset and sends it to your trust. This ensures that you only need to edit beneficiaries in one place (your trust) regardless as to what assets you may forget to place inside of it. Unfortunately, the asset will almost surely need go through the probate process first, however NY State has a mechanism in place to ensure that if probate assets are under $30,000.00, then a much simpler, cost effective and less complex mechanism is available. What this means is that you can have millions upon millions of dollars worth of assets placed within your trust and keep up to $30,000.00 outside of the confines of the document and not be subject to a full probate proceeding. While not always a recommended strategy that is a point worth noting here.
In the end, while you are personally responsible for actually transferring assets into your trust, a smart and thorough Estate Planning attorney will both guide you on some transfers and actually handle some him or herself. What you are going to want is your attorney to carefully explain how each asset is going to be transferred and present you with a list of instructions on what assets you will be transferring yourself. As a general rule, an attorney will likely want to handle any real estate transfers because of the inherently complex nature of the paperwork. While the funding process is not by any means a difficult endeavor, it is somewhat time consuming.. Because of how common Living Trusts are today, you should have little trouble in transferring asset.
Many institutions will actually want to see proof that your trust exists. To satisfy them you can either send them a copy of the document or your attorney will prepare what is often called a certificate of trust. This is a shortened version of your trust that verifies your trust’s existence, explains the powers given to the trustee and identifies the trustees, but it does not reveal any information about your assets, your beneficiaries and their inheritances. Be warned though that funding a trust is a marathon and not a sprint! It is easy to start motivated and then lose interest in completing the work necessary to finish the job. Your attorney can help you prioritize which assets you should concentrate on first.
Generally, assets you want in your trust include real estate, bank/saving accounts, investments, business interests and notes payable to you. You will also want to change most beneficiary designations to your trust so those assets will flow into your trust and be part of your overall plan. IRAs, retirement plans and other exceptions are addressed later. In most cases you will notice little difference in the day to day management (if any) of the assets. You may even find it easy to transfer real estate you own to your living trust, and to purchase new real estate in the name of your trust.
Because your living trust is revocable, transferring real estate to your trust should not disturb your current mortgage in any way. Even if the mortgage contains a “due on sale or transfer” clause, retitling the property in the name of your trust should not activate the clause. There should be no effect on your property taxes because the transfer does not cause your property to be reappraised. Also, having your home in your trust will have no effect on your being able to use the capital gains tax exemption when you sell it, nor will you lose the New York STAR or Senior Citizen tax advantage if you currently are benefiting from those. If you own property in another state, transferring it to your living trust will prevent a conservatorship and/or probate in that state.
One common question that I receive is whether to retitle a car or truck in the name of the trust. Unless the car is valuable and substantially increases your estate, you will probably not want it in your trust. Note that you do NOT gain any personal liability protection from this type of trust, so if you are at fault in an auto accident and the injured party sees that your car is owned by a trust, you will still be personally liable to same the extent you would have been in the event that the car was titled individually. Also, remember as discussed above that all states allow a small amount of assets to transfer using a “small estate proceeding” and the value of your car may part of a small estate.
As it pertains to IRA’s, I recommend not changing the ownership of these to your living trust. You can of course name your trust as the beneficiary, but be sure to consider all your options, which could include your spouse; children, grandchildren or other individuals; a trust; a charity; or a combination of these. Whom you name as beneficiary will determine the amount of tax-deferred growth that can continue on this money after you die. Most married couples name their spouse as beneficiary because 1) the money will be available to provide for the surviving spouse and 2) the spousal rollover option can provide for many more years of tax-deferred growth. (After you die, your spouse can “roll over” your tax-deferred account into his/her own IRA and name a new beneficiary, preferably someone much younger, as your children and/or grandchildren would be.) Interestingly, a non-spouse beneficiary can also inherit a tax-deferred plan and roll it into an IRA to continue the tax-deferred growth, but only a spouse can name additional beneficiaries.
Naming a trust as beneficiary will give you maximum control because the distributions will be paid not to an individual, but into a trust that contains your written instructions stating who will receive this money and when.
Finally, as it pertains to Personal property (artwork, clothing, jewelry, cameras, sporting equipment, books and other household goods), these items typically do not have a formal document reflecting ownership. Your attorney will prepare an assignment to transfer these items to your trust should you wish to do so.
In the end, there are many valid reasons to have a Living Trust prepared for you and/or your family. It is even more important to actually FUND the trust, which is the often overlooked and critical step to utilizing any trust as a part of a well drafted Estate Plan.