With the end of the year approaching, it is appropriate to revisit a basic but yet important and neglected concept central to estate planning: the need to fund your Revocable Trust to avoid probate and, in the case of a married couple, to balance out the estates for tax purposes. The March 31 Post, reprinted below, discussed this funding in more detail. In addition to the guidance provided in the March 31 Post, set forth are common questions clients ask regarding how to transfer assets into their Trusts.
"For purposes of beneficiary designations and transfers to the Trust, this Trust shall be referred to as:
John Smith, Trustee, or his successors, of the John Smith Revocable Inter Vivos Trust, created U/A/D _________________, 2009."
- What is the Trust tax ID number? Because the Trust is a grantor trust and you are the trustee and beneficiary, there is no Trust tax ID number. You use your own social security number when the Trust account is open.
- Does the Trust file an annual income tax return? No, again, because the Trust is a grantor trust, it is ignored for income tax purposes. You file your Form 1040 as if you still own the property in your own name.
- How do I transfer my house into the Trust? We prepare and record a new deed naming the Trust as the owner of the house. You remain liable on any outstanding mortgage. You are entitled to the same income tax benefits as you were when you owned the house in your own name (or jointly with your spouse).
- How do I transfer tangible personal property into the Trust? Because there is not a deed to your jewelry, living room set, or other personal property, you list that property on a Schedule attached to the Trust. However, since real estate, bank and brokerage accounts, life insurance, 401(k)’s and IRA’s, have official documents that reflect ownership or beneficiary designations, those assets can only be transferred into the Trust by changing the source document (e.g., the house deed).
March 31, 2008 Post
Funding Revocable Trusts
A reoccurring theme of many Posts is the importance of funding Revocable Trusts to avoid probate and balance the husband’s and wife’s assets for estate tax planning. More times than not, even those clients who go through the trouble of creating Revocable Trusts fail to fund the Trusts. The pour over Will transfers assets to the Trust, and the Trust then takes over. However, those assets passing from the Will to the Trust go through probate.
Probate is only avoided if the Trusts are created and funded. Part of any estate planning lawyer’s job is recommending how to fund the Trusts. For many clients, the primary assets are retirement plan assets, life insurance, and jointly owned assets such as the home, brokerage accounts, and bank accounts.
Generally speaking, the advice often includes the following:
- Retirement Plan Assets (e.g., IRA, 401k). Name each spouse as the primary beneficiary and your respective Revocable Trust as the secondary beneficiary.
- Life Insurance. The husband would name his Revocable Trust as the beneficiary of any life insurance policies on his life and the wife would name her Revocable Trust as the beneficiary of any life insurance policies on her life.
- Joint and Liquid Assets. Transfer the ownership of joint and liquid assets to either the husband’s or wife’s Trust, or do "50% tenant in common" interest in each of their Trusts, depending on the need to balance out the assets between each Trust. A narrative description can transfer tangible personal property "50% tenant in common" interest into each Revocable Trust.
Of course, these general rules are subject to each client’s situation. For example, regarding retirement plan assets, how do rollover provisions fit with the planning, or the desire to "stretch" the distributions, or naming a charity as the beneficiary of the assets thereby avoiding double tax. Regarding the life insurance, if the clients have a taxable estate, perhaps the life insurance should be transferred into an Irrevocable Life Insurance Trust, in which case the advice above would not apply. Looking at the joint assets, are asset protection advantages lost if tenants by the entirety property is transferred into separate Trusts. These are but some of the issues that need to be considered with your attorney as you decide how to fund your Revocable Trusts.