Creating a Living Trust does not end up with signing it. You will need to fund it. You need to understand how to fund your Living Trust to accomplish the goals for which the trust has been created.
Meaning of Funding of Trust
Funding of a Trust involves the process of transferring assets or property to a Trust. A trust will own only those properties which are transferred to it. If a property is not transferred to a Trust it might be subjected to probate or Estate tax.
In a nutshell, a Living Trust is nothing without a Living Trust Fund.
What is Trust Fund?
The Trust fund is a legal entity that holds property or assets on behalf of a person or organization. They are managed by the Trustee appointed by the Grantor(the person who creates the Trust) and can hold assets like money, stocks, bank accounts, businesses, etc.
Three parties are required to establish a Trust fund:
- Grantor
- Trustee, and
- Beneficiary
Trust funds can be both revocable and irrevocable, and the assets in the Trust fund remains until they are distributed among the beneficiaries at the time specified by the Grantor.
How to fund your Living Trust?
There are 2 methods by which a Grantor can fund the Trust.
- Throughout their lifetime.
Using this method, assets or property can be transferred to the Trust by the Grantor which will be effective immediately while the Grantor is still alive.
- Unfunded until death or incapacitation.
By this method, the Grantor may choose to maintain the trust unfunded until death but they would still need to transfer assets to the trust account to take effect after their death or incapacitation.
Depending upon the type of property, the procedure to transfer it to the Trust fund is different.
What is a Certificate of Trust?
Your Revocable Trust Portfolio contains a Certification of Trust which is used to verify or certify that your trust exists and provides only specific information about your Trust rather than providing complete information about the Trust. In your certification, you state in writing that:
- your trust exists;
- you are one of the Trustees, and
- you have the authority and power to transact business as a Trustee.
You may also use a copy of your Trust if you want but there might be some sensitive information in your Trust that you do not want to disclose, at that point you can use a Certificate of Trust.
Most institutions have their own certification forms for you to fill out. If the institution you are dealing with does not have a form, you can provide them with a copy of your Certification of Trust form. Your Certification of Trust provides only the information that the persons you deal with need to see without disclosing confidential details.
Circumstances under which certificate of Trust may be used:
- While transferring assets to your Trust.
- When your Trust takes a loan.
- When the trustee wants to make financial transactions on behalf of the Trust
- When you want to use the Trust as Collateral.
Do I need a Tax Identification Number(TIN)?
A tax Identification Number is a 9-digit number that is used as a tracking number by the Internal Revenue Service (IRS). TIN is mandatory when someone is filing Annual Tax returns with the IRS.
As long as you are acting as the Trustee of your Revocable Trust, you do not need to obtain a separate tax identification number for your trust or to file a separate trust tax return. The Internal Revenue Service (IRS) prefers that you use your own Social Security number. You can report all of the income generated by trust assets on your personal IRS Form 1040.
When you die, your trust becomes irrevocable for tax purposes. It may split into multiple trusts, each of which may be treated as a separate taxable entity for income tax purposes.
How to Fund a Trust: Real Estate
Transferring real estate to the Trust fund is the most crucial step as they are likely to face Estate taxes and probate.
The process takes place when the interest of the grantor is transferred to the Trust by way of signing a deed. The most common types of Deeds to fund a Trust with real estate are
- Warranty Deed – This type of deed ensures the seller has the right to transfer and clear the title of the property. That is, it transfers property ownership with a guarantee in the title.
- Quitclaim Deed – It is a legally binding document in which the ownership is transferred from one individual to their trust. But there are no guarantees in terms of buyer protection which is not an issue since the ownership is already transferred.
- Transfer-on-Death Deed (TODD) – This Type of deed gives a grantor the ability to assign a person (or people) who shall receive the grantor’s real property upon their death. These are not available in every State.
How to Fund a Trust: Personal Property and Assets without Deeds or Titles
There are a number of properties with no title or deeds and titled properties that are not real estate that a grantor may transfer to the Trust Fund.
- To transfer properties with no title, the grantor will need to sign a general transfer document which will state that these assets or property is now owned by the trustee of the Trust.
- Titled properties like motor vehicles will require a title change. The ownership of the vehicle will be required to move from the name of the owner of the vehicle to the Trust.
Mortgage, Notes, and Other Receivables
If you have loaned money to anyone, you can assign your interest as a lender to your Revocable Trust by a written document and notify your debtor of the assignment.
How to Fund a Trust: Bank Accounts and Other Financial Accounts
For this purpose, you will need to contact your Bank as each bank has its own process and policies.
The General procedure will be as follows:
Step 1: Contact your bank for the necessary forms for transferring assets to trust.
Step 2: Fill, Sign, and submit the form to the Bank.
Step 3: Bank may sometimes ask for the Trust documents and will transfer the bank account and other financial accounts to the Trust.
How to Fund a Trust: Investment Accounts
If you hold publicly traded stocks and bonds that are already in brokerage or investment accounts, contact your brokers or custodians and direct them to change the title of the accounts to the name of your trust. The procedure for doing so is the same as the procedure for retitling cash accounts explained above. You may have to complete new account applications and present a copy of your Affidavit or Certification of Trust in order to change the title. The title of the accounts can be in the Trust’s name.
After changing the title, your next account statement will confirm the retitling by listing you as the Trustee of your trust.
How to Fund a Trust: Stocks and Bonds Not Held in Investment Accounts
If you possess original stock or bond certificates, there are two ways to transfer the certificates to your trust.
- Open a brokerage or investment account in the name of your Revocable Trust and deposit your original certificates in the account. (You may later have your broker deliver the certificates to you made out in the name of the trust if you wish.) Your future account statements that will be titled in the name of your Revocable Trust will prove your ownership of the transferred stock or bonds.
- Work directly with the transfer agent for the stock or bond and direct the agent to reissue your stock with your Revocable Trust named as the new owner.
Stock Options
Transferring or assigning stock options requires a careful analysis of the tax and legal issues. You may want to ask your Certified Public Accountant (CPA) and your stock plan administrator about your choices in assigning your interests to your Revocable Trust.
How to Fund a Trust: Life Insurance Policies and Annuities
You may want to tax-proof your major life insurance policies by creating one or more irrevocable life insurance trusts. Alternatively, you may want the proceeds from your insurance policies paid directly to your Revocable Trust.
If you decide to name your Revocable Trust as the beneficiary of a policy, here are several points you can consider.
- Your policy beneficiary designation, not your Will and Revocable Trust, controls the disposition of the policy benefits.
- Generally, you can designate your Revocable Trust as the beneficiary of your life insurance policies so the policy proceeds will be governed by the terms of the Revocable Trust. Your agent will make the change for you or provide you with the beneficiary designation form for you to complete.
- If you name your Revocable Trust as the primary beneficiary, you can name your spouse, partner, or children as the secondary beneficiary.
Each insurance company will have its own preferred format for designating your Revocable Trust as the beneficiary.
How to Fund a Trust: Miscellaneous Interests
Partnership Interest
If there are no restrictions in your general partnership agreement, your interest in the general partnership can be transferred through a written assignment of interest signed by you and acknowledged by your partners. Transfer of an interest in a limited partnership is accomplished in the same way as the transfer of a general partnership interest.
Corporate Business or Professional Interests
You can contact your corporate counsel or ask us to assist you in transferring your professional business interests to the Revocable Trust.
● If your business is a corporation, you will have to cancel shares held in your name and reissue them in your name as Trustee of your Revocable Trust.
● If your business is a limited liability company, you can draft assignment documents to assign your interest to your Revocable Trust.
Sole Proprietorship Business Interests
A sole proprietorship is a business entity owned by one person. Ownership of a sole proprietorship can be transferred to a Revocable Trust with a written assignment of interest. All items of tangible personal property can be listed individually or by category in the assignment.
Oil, Gas, and Mineral Interests
The method of transferring interests in oil, minerals, and gas depends on whether you own or lease the interests. Generally, if you own the interests, you can record a deed that titles your interests to your Revocable Trust. If your interest is a lease, you can assign your rights as a lessee to your Revocable Trust by a written assignment.
