DECEMBER 28, 2015 VOLUME 22 NUMBER 48
When our clients establish revocable living trusts, we help them transfer assets to the trust's name. That's not unique -- most law firms help clients through the process. This is often referred to as "funding" the trust, and it can be more complicated than it seems like it might be.
Some asset transfers are relatively straightforward. A deed can transfer your home and any other Arizona real estate into the trust. A trip to the bank and another to your stockbroker can complete those transfers (we can't make those changes directly from our office, but can give you help and directions). There are a number of assets, though, that will often require some special considerations. Depending on your circumstances, those might include:
IRAs and other retirement accounts. These are often the most challenging. Depending on your family situation and the terms of your trust, it might be important to name the trust as a beneficiary (or maybe an alternate beneficiary) on your retirement accounts. For the next person in similar circumstances, it might be a mistake to name the trust as beneficiary. There are specific rules that have to be addressed, and this one requires some individualized attention.
Out of state real estate. This is often the most important item to transfer into the trust's name and, unfortunately, we usually can't help you with that transfer. We aren't familiar with deed practices in other states, and aren't qualified to practice law in those states, either. Unfortunately, your (or we) will need to make arrangements with a law firm in the other state to complete the transfer. We'll take care of the details, but it will add another cost to the establishment of the trust.
Your home. Normally we want your home transferred into the trust's name, but not in every circumstance. For people with special property tax breaks, for instance, it might be important to keep the home in the owner's individual name. We might be talking about creating a "beneficiary deed," an option Arizona permits for transfer of real estate to another person -- or to a trust -- automatically on your death.
Life insurance. Often we counsel that you should name the trust as beneficiary on your life insurance policies, but not in every instance. One difference: if the life insurance goes straight to beneficiaries, it clearly is not liable to claims made against your estate or trust. If you name your trust, or your estate, as beneficiary, you could be subjecting the life insurance to those claims. This is normally not a big issue, but we do need to think about it for a few moments before naming beneficiaries.
Vehicles. We usually do not push clients to transfer their cars into the trust, partly because the difficulty and cost are greater for this transfer than for many others. Besides, under Arizona law we can collect up to $75,000 of your assets even if they are outside the trust at your death, and few clients have vehicles worth that much. We do suggest that you think about the trust next time you buy a car, and ask about titling it to the trust. Make sure your insurance agent knows about the title to the car, and that your insurance is not affected (it shouldn't be, but double check). Arizona permits a "transfer on death" designation for car titles, and sometimes we like to employ that approach to ensuring that the vehicle transfer is not a problem when you die.
Some vehicles are more valuable, or more problematic for other reasons. We have transferred airplanes, recreational vehicles and commercial trucks to trusts; the importance of accomplishing the transfer is clearer when the value of the vehicle is larger.
Let us also mention another problem that comes up frequently with vehicles. Suppose you intend to leave your house and all its contents to one beneficiary. Is the car parked in the garage included? You get to decide, but simply saying "house and its contents" might leave a significant asset unresolved.
Annuities. The choice of owner and beneficiary for annuities will vary depending on income tax issues, purpose of the annuity and its change in value over time. As with retirement accounts, it can be hard to generalize about annuities. We'll need to discuss this asset class.
Operating bank account. What about the bank account you use for direct deposit of your Social Security and retirement payments? Should it be titled to the trust, or kept in your individual name? We generally prefer that you transfer even that account to the trust's name, but that will usually mean a new account, new checks (they can still carry your individual name) and new debit cards. Another option: keep one small operating account outside the trust, but name the trust as "payable on death" beneficiary.
Clients frequently establish a living trust, transfer all of their assets to the trust, then worry about making sure there's money available for emergencies "in case something happens" (by that they usually mean "when I die," but that's hard to say). There's no need for an emergency account -- the trust authority automatically transfers to your successor trustee on death, and the delay in getting access to the accounts will normally be very short.
Are you worried about having money immediately available? You might think about naming the daughter who will be your successor trustee as co-trustee instead. Give her immediate authority to manage trust assets, and she won't have to prove your death in order to take over responsibility that she already has. Besides, creating even a small account with her as a joint owner invites family disputes about whether that account was supposed to be inside the trust or separate.
Our takeaway: "funding" your trust is more complicated than it looks like it might be. Talk to us about the best way to handle your various asset types. We can help figure this out.