What You Should Know About Trust Funding
by Tom Bouman
by Tom Bouman
1.
What is Trust Funding?
Funding
is the term used to describe how a trust acquires ownership or control of an
asset. There are many types of trusts and many benefits of establishing
them, but a trust must actually own an asset to make it work. An unfunded
or partially funded trust does not achieve its objectives.
There are two methods of funding assets into a trust, depending on the type of asset:
· Ownership Changes. Many assets will be funded by changing the title from individual name to the name of the trustee. For example, a bank account would be re-titled to show ownership as Thomas J. Bouman, Trustee of the Thomas J. Bouman Living Trust.
· Beneficiary Changes. Other assets, such as retirement accounts, life insurance, annuities, and some real estate, may be funded by naming the trust as beneficiary upon the owner’s death.
There are two methods of funding assets into a trust, depending on the type of asset:
· Ownership Changes. Many assets will be funded by changing the title from individual name to the name of the trustee. For example, a bank account would be re-titled to show ownership as Thomas J. Bouman, Trustee of the Thomas J. Bouman Living Trust.
· Beneficiary Changes. Other assets, such as retirement accounts, life insurance, annuities, and some real estate, may be funded by naming the trust as beneficiary upon the owner’s death.
2.
How is real estate transferred into trust?
Real
estate is usually transferred into trust by recording a new deed in the county
where the property is located. This process involves finding a copy of
the existing deed – referred to as a current vesting deed – and then recording
a new deed in its place. Each state and county has its own rules and
preferences for what information must be included on the deed and how it must
be signed and recorded. It is critical to avoid errors when re-titling
real estate because even a minor typo can create problems many years
later.
When real estate is transferred into trust, it is important to inform the homeowner’s insurance company so it can add the trust as an additional insured to the insurance policy. Also, the mortgage lender should be notified before mortgaged investment property (a primary residence is exempt from this requirement) is transferred into trust. Failure to do so may trigger the due-on-sale clause in the mortgage.
When real estate is transferred into trust, it is important to inform the homeowner’s insurance company so it can add the trust as an additional insured to the insurance policy. Also, the mortgage lender should be notified before mortgaged investment property (a primary residence is exempt from this requirement) is transferred into trust. Failure to do so may trigger the due-on-sale clause in the mortgage.
3.
What about cash accounts and
non-retirement investment accounts?
Bank
and credit union accounts, CDs, and other investments not held in tax-deferred
retirement accounts should be re-titled into the name of the trust. This
usually requires submitting new account documentation to the financial
institution and providing evidence the trust exists.
Arizona law permits the use of a Trust Certification as a substitute for delivering a copy of the entire trust document to the financial institution. This document includes only the essential information without sharing any confidential information about the beneficiaries of the trust. Many financial institutions have their own form of Trust Certification.
As long as the trust grantor is also acting as trustee of the trust, a separate employer identification number is unnecessary for a revocable living trust. The trust should simply use the grantor’s social security number. Any income earned will be taxed to the grantor and reported on IRS Form 1040.
4.
What about business interests?
If
stock in a corporation is to be transferred into trust, the shareholder’s
existing certificates should be cancelled and re-issued in the name of the
trust. Likewise, if LLC membership interests are to be transferred, an
assignment should be prepared to transfer ownership. All corporate
transfers should be accompanied by formal authorization from the shareholders and
board of directors. All LLC transfers should be accompanied by written
authorization from the manager or managing member.
5.
What about cars and RVs?
Motor
vehicles are transferred into trust by obtaining new title from the department
of motor vehicles. The insurance company should be notified in order to
add the trust as an additional insured onto the auto insurance policy.
6.
What about retirement plans and life
insurance?
A
life insurance policy may be funded by naming the trust as beneficiary on a
beneficiary designation form supplied by the insurance company. The
exception is for policies to be owned by an Irrevocable Life Insurance Policy,
for which ownership of the policy must be in the name of the trust.
A retirement account may name a trust as primary or contingent beneficiary by submitting a beneficiary designation form to the administrator of the account.
A retirement account may name a trust as primary or contingent beneficiary by submitting a beneficiary designation form to the administrator of the account.
7.
What about personal effects?
Personal
effects, household furnishings, and the like, are funded into trust by written
assignment. Since they do not have titles or deeds, there is no need to
record the assignment anywhere.
About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection. He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law. Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.
About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection. He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law. Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys.
Thomas J. Bouman
Attorney - Author - Speaker
www.TomBoumanLaw.com
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