Revocable Trusts Work Best When Funded
The secret to making revocable trusts work best is to fund them. That step is necessary to avoid probate and to make it easier for your trusted fiduciary to step in easily if you ever become incapacitated. This means retitling assets — whether real estate, bank accounts or investment accounts — in the name of the trust. All too often, attorneys draw up wonderful estate planning documents, advise clients to fund their trusts, and then nothing happens. Trusts have no relation to assets that are not retitled. However, if you execute a “pour-over” will along with your trust saying that at your death all of your assets will be distributed to your trust, your wishes as to the ultimate distribution of your estate will be carried out. You just won’t avoid probate and will not have as good incapacity protection.
On two occasions in our practice we’ve had estates involving men who created their trusts on their own and didn’t execute wills or fund the trusts. The result in one case was that the property went to people the man had intended to disinherit. In the other, the heirs at law agreed to follow their father’s wishes even though this meant giving his $1 million house to his girlfriend – generous children.
How to Retitle Assets
To place bank and investment accounts into your trust, you need to retitle them as follows:
Hillary and Bill as Trustees of The Hillary Revocable Trust created by agreement dated June 26, 2017.
Depending on the institution, either you will be able to change the name on an existing account or you will need to open a new account in the name of the trust and then transfer the funds. The financial institution will probably require a copy of the trust, or at least of the first page and the signature page, as well as signatures of all the trustees.
As long as you are serving as your own trustee or co-trustee, you can use your Social Security number for the trust. If you are not a trustee, the trust will have to obtain a separate tax identification number and file a separate 1041 tax return each year. You will still be taxed on all of the income and the trust will pay no separate tax.
How About Real Estate?
You will need to execute a deed and a trustee’s certificate to transfer real estate into the trust. If you have a mortgage on your property, the mortgage document may have a clause requiring notice of any change in title and perhaps even a due on sale clause that applies. However, we have never given notice in our practice and have never seen an issue arise as long as the clients continue to make their monthly mortgage or line of credit payments. However, if you intend to refinance your property or take out a line of credit, wait until you do so before deeding the real estate into your trust. In most instances, banks and other lenders require that you remove the property from the trust and put it back in your name before signing any new mortgage papers.
Depending on your state, you may also need to redo a homestead declaration after transferring property into a revocable trust.
Don’t Forget Beneficiary Designations
Finally, make sure that you update the beneficiary designations your insurance policies and any accounts that permit named beneficiaries to the trust. However, do not name the trust as beneficiary of your retirement accounts without first consulting with an estate planning professional. There are complicated rules governing retirement accounts and trusts and unless the trust is properly drafted, your heirs might lose the ability to “stretch” the IRA, meaning that they will have to withdraw the funds and pay taxes on them within five years of your death, rather than withdrawing the funds gradually during their lifetimes.