Updated 3/21/04
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What is funding?
How to amend the Trust
How to title assets
How to title Separate Property
Using Joint Tenancy
Where do you start?
How to transfer Life Insurance
How to transfer IRA/Keogh benefits
How to transfer Bank Accounts
How to transfer Deeds and Trust Deeds
Homeowner's Exemption
How to transfer Stock
Automobiles--Why we don't transfer
Tangible Personal Property Items
What about Income Tax Returns and Tax I.D.'s
Using "Self Funding Letters"
What is Funding? It is important that you
understand some of the fundamental requirements of your "LIVING
TRUST", so that it can properly function. As you are undoubtedly aware,
the primary reasons for the creation of a living trust are: (1) to provide a
means for continuity of ownership and management of your assets in the event of
your incapacity, disability or death, (2) to avoid probate at the time of your
death, and (3), in some cases, to avoid burdensome estate taxes. In order to
attain these goals, it is essential that all of your major assets be
transferred into your trust and that any assets which you acquire from this
point forward be acquired in the name of your trust.
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(1) Amendment. These documents are
executed with certain formalities and can be changed or revoked only by using
similar procedures. A note in the margin of your document, or a striking out of
words, even next to your signature, is ineffective. We cannot overemphasize the
need to follow the proper steps for amendment. You should complete a
Trustworthy notice of amendment form, and execute a new Trustworthy page
containing your amended provisions. You should not destroy the old page, but
should insert the amendment form and new page either at the page that is
amended, or at the beginning or end of the trust, where it can be found.
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(2) Keeping the
Trust Funded. Although executing the trust documents provides you with an
orderly disposition of your estate, you will not avoid probate unless and until
the trust obtains legal title to your property. This procedure is called
"funding" the trust. Documents of title must be executed to fund the
trust. You will need new signature cards for the trust bank accounts and new
documents of title (deeds) for your real property. Benefits from your insurance
and employee plans may be directed to the trust in the event of your death.
Title to assets you acquire in the future should be put in the trust's name; if
you take title to property in your own name, and not as trustee, you will undo
the trust to that extent.Recognizing that banks, or other companies may have
their own shorthand legend and abbreviations for the trust designations, or may
state the information in a different manner and/or order, we suggest the
following ways of holding title to assets in the trust. In general, title to
COMMUNITY PROPERTY real estate should be held as follows: (Smith shall be used
for all illustrations)
GERALD L. SMITH and MARY D. SMITH, trustees of the SMITH FAMILY TRUST for the
benefit of GERALD L. SMITH and MARY D. SMITH and their issue under instrument
dated ____________________, 19___. (date of execution)
For some investments, bank accounts, etc. or in some situations, you may
abbreviate the trust designation, e,g.,
GERALD L. SMITH and MARY D. SMITH, trustees of the SMITH FAMILY TRUST, U/T/D
dated ____________________, 19___. (date of execution)
OR
GERALD L. and MARY D. SMITH, trustees, U/T/D dated ___/___/9___.
(date of execution)
(U/T/D stands for Under Trust Declaration.) This designation usually requires two signatures. Your Trustworthy trust allows for one signature under paragraph 6.4. but generally only for any investments which presently allow one signature (such as bank accounts). You will still need two signatures on real property deeds, stocks, etc. When one signature is allowed on non-real estate assets (primarily bank accounts), use or instead of and. If you named both spouses as initial trustees and selected "independent powers" on page 1 of your trust, either spouse as trustee can generally exercise any power stated in Article Six of the trust including the sale of real estate.
The separate property of each of you should be so designated if the property is to retain its character. If Mrs. SMITH obtains a piece of property which she desires to maintain as her separate property, then the property could be transferred to both trustees as above, but the designation should specify (after the date of the trust): "separate property of MARY D. SMITH." For example:
GERALD L. SMITH and MARY D. SMITH, trustees of the SMITH FAMILY TRUST under instrument dated __________________, 19___, separate property of MARY D. SMITH. (date of execution)
or, using the Separate Property subtrust under Paragraph 6.3.(m) as follows:
MARY D. SMITH, Trustee of the Mary D. Smith Separate Property Trust, UTD (date), 19__
(3) Life Insurance & Annuities (not tax deferred or tax sheltered annuities). Life Insurance and Annuities should be payable to your trust as a primary beneficiary. Always check with your insurance/annuity carrier, or pension death benefit representative. Try to obtain a "change of beneficiary" form specifically designed for a trust-not an "estate", or use the Trustworthy funding letter for insurance. A trust beneficiary form always asks information readily available such as the name and date of your trust, trustees, etc. Sometimes there is no form available for your trust. You may then use a regular change of beneficiary form. If married and the policy/annuity is on the husband's life designate as follows:
PRIMARY BENEFICIARY - "MARY D. SMITH, trustee of the SMITH FAMILY TRUST dated ____________________, 19___."
(date of execution)
SECONDARY BENEFICIARY - (May be left blank)
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(4) It is recommended that IRA, Keogh and other deferred income tax plans should not be paid to a trust unless there is a special situation where it would be better to pay the income tax at time of death than to pay directly to the beneficiary (who may be on drugs, spendthrift, gambler, etc.) If you are going to designate the Trust as a beneficiary (you will lose the Spousal Rollover to an IRA from a KEOGH Plan after death, and taxes will become due on the entire lumpsum payment. This is also true for beneficiaries other than your spouse). Pension and Deferred Income Plans. Pension plans are themselves a trust, so if you have a pension IRA, Keogh, STRS, PERS, Tax Sheltered Annuity, 401, 402, 403, etc., you cannot put that in the name of the trust. To remove the investments in your retirement program results in a taxable distributon. Ordinary "defined benefit plans" quit paying after death or the last spouse to die and there is nothing to transfer to the trust. Therefore it is unnecessary to do anything with them as far as the trust is concerned as there will be nothing to pass down to your heirs. However, a lump sum death benefit, may be paid to your spouse, if living, and if not, the benefit may be paid to the trust, subject to income taxes. A lumpsum payment is the type of retirement plan that may have something left to leave to your heirs at the death of the last spouse. Payments to trusts, charities, estates, etc. are not payments to individuals. As such they are generally not a "qualified" beneficiary. To make this plan payable to your heirs rather than the trust as a contingent beneficiary, you should obtain change of beneficiary forms from your pension administrator or representative for lump sum distributions (death benefits). You should complete the change of beneficiary form for any tax deferred plan, and send the original executed forms to the appropriate institution. These changes are not effective until received and acknowledged by the companies. The proceeds from retirement plans (IRA's, KEOGH's, etc.) should go first to your spouse (if you desire to make a gift to your spouse), if alive, and, if not, then to named qualified persons rather than your trust. This will enable your spouse to "roll over" the proceeds to a new IRA. The new "roll over" IRA will enable your spouse to continue to defer income taxes to age 70 1/2 provided that you have not begun to draw on the retirement fund. If you have begun to draw on it, your spouse must continue to draw on it from the "roll over" IRA. The remaining funds continue to remain untaxed. Only the amount draw from the fund will incur current income taxes. If your spouse elects to receive the distribution, and not roll it over, your spouse will pay a tax on the lump sum.
The Beneficiary Designation Form obtained from your plan administrator should be filled in as follows:
Primary Beneficiary- "Your Spouse's name"
Contingent Beneficiary- Names and Percentages to Named Persons
(date of execution)
(5) Bank Accounts. Many attorneys advise
placing every asset, including checking and savings accounts into the trust.
Trustworthy gives you two choices in this regard. First, you may leave your
regular checking account and perhaps a small savings account out of the trust,
and simply add the successor trustee's name as an agent on the account. This
would enable this agent to sign checks or use savings to pay bills and other
expenses if you have a short term disability. The second option is to transfer
the accounts to your trust, and then authorize the successor trustee to use
those accounts without having to "take over" or assume responsibility
for the entire trust. This authorization is called "a deputy"
designation. Check with your banks. If they allow such an authorization you
probably should deputize one or two accounts for an emergency fund. If the bank
does not allow such a designation then use "agency" or "power of
attorney" on the checking and a small savings account for emergencies. The
bank may request a copy of the signed trust instrument (or parts of it) for
examination by their legal department and/or for their records. This is normal
and should not be any problem. They are safeguarding your interests as well as
theirs
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(6) Deeds or Deeds of Trust. To transfer your residence and other real property to the trust, you as trustors must execute Trust Transfer Deeds (or other types of deeds as necessary) showing the property transferred to the trustee of your trust.After the deeds are executed, they must be sent to the county recorder's office to be recorded. There will be no reassessment of your California property under Proposition 13 as a result of this transfer. Under California Revenue and Taxation Code section 62(d), a "change in ownership" does not include any transfer into a trust if the trust is revocable. No transfer tax will be due, because the property has not been sold. If you receive a letter from the county assessor asking you questions about the nature of the trust and you are unable to respond, please contact us, and we will be glad to respond on your behalf. If you are transferring commercial property, or an apartment building which is not owner occupied and has more than 4 units, you will need to obtain consent of the lender prior to transferring the property. If your lender requests an attorney opinion letter, contact Trustworthy for such a letter.
BENEFICIAL INTEREST IN A DEED OF TRUST. To transfer any BENEFICIAL INTEREST IN A DEED OF TRUST, an Assignment of Deed of Trust must be prepared, executed, notarized, and recorded with the County Recorder.
****HOMEOWNER'S EXEMPTIONS****. If you are presently claiming a Homeowner's Property Tax Exemption (or any other exemption), after the new Trust Transfer Deed is recorded, you may receive a card or letter from the County Assessor asking you to refile forthe Exemption. If you receive such a card or letter, just fill it in and mail it back to the assessor. For the purchase date, use the original date you purchased your home.
(7) Stock. The transfer of your stock to
the trust must be accomplished by changing title on the stock certificates
themselves. If you hold your shares through a brokerage firm, you need change
the title on only the brokerage accounts, rather than oneach share certificate.
If either of you holds title to your securities in your name, however, the
stock should actually be transferred to the two of you as trustees. Your broker
can help you make this change for a small charge per certificate. In general,
title should be held as specified above (see Keeping the Trust Funded). Your
stockbroker or financial planner should be able to tell you which designation
would be preferred.Your stockbroker may request a copy of the signed trust
instrument for examination by his or her firm's legal department. You may or
may not be asked to provide a copy of the entire agreement-it varies from firm
to firm. A copy of Article One showing Trustor(s), the name of the trust,
Initial Trustees, and Successor Trustees, and a copy of Article Six (showing
trustee powers), and the signature page with Notary block will demonstrate that
the trust is properly executed and the trustee(s) have the necessary powers to
borrow money; buy and sell stocks, bonds, and options; trade on margin; and
conduct other trust business.
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(8) Automobiles. You will
generally not want to transfer title to any automobile(s) to the trust, as you
would not want to disclose the existence of a trust in the event of an
automobile accident. If you have transferred your home and other assets to the
trust, your trustee will be able to change title at the DMV without probate by
using the Pourover Will.
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(9) Other Tangible Personal
Property. You have transferred your tangible property to the trust by the
execution of a bill of sale (Assignment of Tangible Personal Property) attached
to the last page of the trust instrument. Please let me know whether you have
other property we may not have considered, such as an airplane, a yacht,
horses, copyrights, patents, or royalty contracts.
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(10) Tax Returns. The regulations under the
Internal Revenue Code were recently amended to provide that newly established
grantor trusts of which the grantor is trustee or co-trustee need not file a
fiduciary tax return. Because you are the owners of all property in the trust,
you will continue to report all trust income as though it were your own (on
your 1040 form). These new rules obviate the need to obtain a tax
identification number for the trust as long as one of you remains a co-trustee.
You may give your own social security numbers when opening accounts in the name
of the trust instead of a Federal Employers Number. When a death occurs, if a
portion of the trust is to become irrevocable, one or more new entities come
into existence. This necessitates obtaining a tax identification number for
each new entity and filing separate returns for each new entity, such as the B
or C Trust. The trust must also obtain a taxpayer identification number and
file a return if a third party or corporate fiduciary becomes sole trustee.
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(11) Joint Tenancy. You should not hold
any assets as joint tenants without consulting an estate planning attorney or
Trustworthy. A joint tenancy will totally avoid the trust, may frustrate your
intentions as the joint tenancy asset is not part of the trust. Joint Tenancy
can result adverse income tax consequences. If you desire to leave an asset out
of the trust to pass to the other joint tenant, you may do so. However, the
asset may be unavailable to your trustee or personal representative to be used
for paying bills, etc. if you are incapacitated.
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(12) Getting Started. Here are some
tips on starting to transfer your assets to the trust. The goal here is to
start with the largest assets and "work down" to the smallest. Since
July, 1987, we can transfer in probate any combination of both realestate and
personal property valued in total at less than $100,000.00 in less than 90
days. We call this a "mini-probate". However, if you have left no
real estate out of the trust, and if all other assets are less than
$100,000.00, we can transfer those assets without any petition in probate. Keep
this in mind, because you may not wish to trouble yourself with something like
a small limited partnership interest if there is an unusually high transfer fee
associated with the transfer, or perhaps if you have a small "note"
due in the near future, or other small investments that you might consider a
"nuisance" to change title on. Our advice is to "work down"
to the small but troublesome assets. Even though they may be small and
troublesome, if you are going to continue to hold those assets, it is generally
easier for you to transfer them to the trust now than it will be for the heirs
to gain title to them following death. We have provided some sample letters to
the bank, broker and insurance agent, along with some sample assignment forms
for a sole proprietorship or limited partnership. You should make a copy of the
form saving the originals for future use.
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(13) Self-Funding Letters. We have enclosed
a series of letters and forms which you may give to your banker, insurance
agent, broker, etc. (Find them under "Funding Letters" index tab in
binder) These letters and forms should ease your funding of the trust. These
forms may not work for all types of assets (especially separate property
designations) or with all institutions. However, if these letters are not
accepted in a particular situation or by a particular institution, the official
or institution involved will usually tell you what must be done or what forms
must be used to transfer title of a particular asset to the trust. If the
letter doesn't work, and no help is forthcoming from the institution involved,
then give us a call. We will be happy to try and offer advice on how to proceed
in that particular situation. Please let Trustworthy know if you have any
questions which are not answered in this letter. We try to anticipate all the
possible questions which might arise, or the problems you might run into, as
you begin the process of changing title on your various assets, and, attempt
herein, to give you some of the answers for those questions, and solutions to
some of those very same problems that others before you have run into. For more
information regarding the Durable Powers of Attorney, we urge you to read the
General Information and Instruction Letter which is also included in the
correspondence section of your binder. If you have any particular difficulty in
changing title or transferring assets to the trust, or if you have any other
comments on any items that you think need more clarification in this letter,
please let us know. It is mainly through the feedback we receive from you, our
trust clients, that we learn of any of the practical problems that are to be
encountered out there, and, as we learn of them, incorporate the possible
solutions into this information letter. Thank you again for allowing us to be
of service to you
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