Estate Planning

Some clients wonder if putting real estate in their Living Trust will cause any inconveniences. In most cases, you will notice little difference. 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. Refinancing may not be as easy. Some lending institutions require you to conduct the business in your personal name and then transfer the property to your trust. While this can be annoying, it is a minor inconvenience that is easily satisfied.
 
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.
 
Also, having your Living Trust as the owner on your homeowner, liability and title insurance may make it easier for a successor trustee to conduct business for you. Check with your agent.
 

Do not change the ownership of these to your living trust. You can 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 pass away.
 
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 pass away, 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.) 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.
 
Of course, any time you name an individual as benefi­ciary, you lose control. After you pass away, the beneficiary can do whatever he or she wants with this money, including cash­ing out the account and destroying your carefully made plans for long-term, tax-deferred growth. The money could also be available to creditors, spouses and ex-spouses, and there is the risk of court interference at incapacity.
 
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. After you pass away, distributions will be based on the life expectancy of the oldest beneficiary of the trust. You can also set up separate trusts for each beneficiary so that each one’s life expectancy can be used.
 
The rules for these plans have recently been made simpler, but it is still easy to make a costly mistake. Because there is often a lot of money at risk, be sure to get expert advice.

The general idea is that all of your assets should be in your trust. However, there are a few assets you may not want in your trust, or that cannot be put into your trust. 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.

Assets You Probably Want in Your Living Trust

• Real property (home, land, other real estate)
• Bank/credit union accounts, safe deposit boxes
• Investments (CDs, stocks, mutual funds, etc.)
• Notes payable (money owed to you)
• Life insurance (or use irrevocable trust)
• Business interests, intellectual property
• Oil and gas interests, foreign assets
• Personal untitled property

Assets You Probably Do Not Want in Your Living Trust

• IRAs and other tax-deferred retirement accounts
• Incentive stock options and Section 1244 stock
• Interests in professional corporations

If you’ve set up a Revocable Living Trust, congratulations! You’re definitely on the right track. But you are only half way there. Many believe because they took the time to create a Trust, their estate will automatically avoid probate. Unfortunately, this is false.  The key to probate avoidance is proper asset ownership, including the full funding of your Revocable Living Trust.
 
What Assets Require Probate?

• Accounts and real estate titled in your sole, individual name [without a payable on death (POD) or transfer on death (TOD) designation]
• Accounts and real estate you own as a tenant in common
• Contract assets naming your estate as beneficiary

What Assets Avoid Probate?

• Accounts and real estate owned as joint tenants with rights of survivorship
• Accounts and real estate owned as tenants by the entirety
• Life insurance
• Retirement accounts, including IRAs, 401(k)s, and annuities
• Life estate property
• Payable on death (POD) and transfer on death (TOD) accounts and, in some states, transfer on death or beneficiary deeds

What’s the Next Step?
 
 Ask a qualified estate planning attorney to confirm that your Revocable Living Trust is fully funded and that all assets are aligned with your estate planning. Proper asset ownership is key to probate avoidance.

These days many people choose a revocable living trust instead of relying on a will or joint ownership in their estate plan. They like the cost and time savings, plus the added control over assets that a living trust can provide.
 
When properly prepared, a living trust can avoid the public, costly and time-consuming court processes at death (probate) and incapacity (conservatorship or guardianship). It can let you provide for your spouse without disinheriting your children, which can be important in second marriages. It can save estate taxes. And it can protect inheritances for children and grandchildren from the courts, creditors, spouses, divorce proceedings, and irresponsible spending. Still, many people make a big mistake that sends their assets right into the court system: they don’t fund their trusts.
 
What is “funding” my trust?
 
Funding your trust is the process of transferring your assets from you to your trust. To do this, you physically change the titles of your assets from your individual name (or joint names, if married) to the name of your trust. You will also change most beneficiary designations to your trust.
 
Who controls the assets in my trust?
 
The trustee you name will control the assets in your trust. Most likely, you have named yourself as trustee, so you will still have complete control. One of the key benefits of a revocable living trust is that you can continue to buy and sell assets just as you do now. You can also remove assets from your living trust should you ever decide to do so.
 
Why is funding my trust so important?
 
If you have signed your living trust document but haven’t changed titles and beneficiary designations, you will not avoid probate. Your living trust can only control the assets you put into it. You may have a great trust, but until you fund it (transfer your assets to it by changing titles), it doesn’t control anything. If your goal in having a living trust is to avoid probate at death and court intervention at incapacity, then you must fund it now, while you are able to do so.
 
What happens if I forget to transfer an asset?
 
Along with your trust, your attorney will prepare a “pour over will” that acts like a safety net. When you die, the will “catches” any forgotten asset and sends it to your trust. The asset will probably go through probate first, but then it can be distributed according to the instructions in your trust.
 
Who is responsible for funding my trust?
 
You are ultimately responsible for making sure all of your appropriate assets are transferred to your trust.