How Do I Fund My Revocable Trust?

 In Revocable Trusts

Question:

I have a will and a revocable living trust. I just read about the complications in funding the trust; i.e., to change my accounts names into the trust’s name, even having to close and reopen my accounts with the trust’s name! May I ask if what I’m doing is correct? (1) I’m notifying the institutions where I have IRAs, annuities and checking account to name my trust as the sole beneficiary for which I send them the first and last signature pages. (2) The remaining accounts are CDs and savings accounts and these are the ones I dread to start as I need to re-title them. (3) I also have some tax free municipal bonds, are these to be re-titled too, or is it sufficient to just name the trust as sole beneficiary?

Response:

These are good and not unusual questions. All too often, estate planning attorneys draft perfectly good trusts for clients and then don’t guide them on how to fund their trusts.

Rather than name your trust as beneficiary of your various accounts, it’s better to re-title the accounts in the name of the trust, despite the fact that this may mean closing and reopening new accounts in some instances. While both steps avoid probate at your death, only re-titling the accounts gives your trustee access in the event of your incapacity. The trouble you have to go through now to effect the re-titling could save your trustee a lot more difficulty in the future.

That’s the general rule, but there are some specific exceptions. You may or may not be able to re-title your annuity. You will have to check with the annuity company or the broker who sold it to you.

More importantly, you cannot re-title your IRA in the name of your trust. That would force a liquidation of the IRA and the payment of taxes on it, which you don’t want. In addition, you may or may not want to name your trust as beneficiary of your IRA. If your trust ends at your death with everything being distributed to your beneficiaries, it’s easier simply to name them as beneficiaries of the IRA. On the other hand, if your trust will continue after your death to provide for management and protection of the trust assets for your beneficiaries, then you can provide these same protections to your IRA funds by naming the trust as the beneficiary at your death. However, before you take this step make sure that the trust meets the requirements to qualify as a designated beneficiary so that the minimum distributions can be stretched out over the life expectancies of the beneficiaries. If the trust does not meet these requirements, the IRA will have to be liquidated within five years of your death and all of the taxes paid on it at that time. Your estate planning attorney should be able to advise you on this.

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