Why You Should and How to Transfer Assets into a Revocable Living Trust

A grantor—also commonly referred to as a trustor or settler—is the person who creates or establishes a trust. Furthermore, a living revocable trust is a trust created during the lifetime of the grantor. While the grantor is alive and has the capacity, they have the authority to revoke the trust, change the terms of the trust, remove property from the trust, and add a property to the living revocable trust. Additionally, the cost and time savings that a trust offers the grantors beneficiaries makes this estate planning instrument extremely valuable.

For example, if you hire an attorney that properly creates a living trust, your assets and beneficiaries can avoid the public, costly, and time-consuming probate process. You can also avoid the issues that occur if you were ever to experience incapacity. Furthermore, this estate planning tool allows you to provide for your spouse and children. While normally not an issue, if you have been married multiple times and had children with different spouses, you can ensure that your current spouse and any previous children you had will receive a portion of your estate. Finally, a living trust can save estate taxes and protect assets for spouses, children, grandchildren, or charities from the courts, creditors, divorce proceedings, greedy outsides, and irresponsible spending.

What is “Funding” my Trust?

Funding your trust is the process by which you transfer assets—whether real estate, financial accounts, or other types of property—into the living trust. For assets such as real estate or vehicles, you have to physically change the titles of your assets from your name to the name of the trust. Similarly, for financial accounts, you will have to add or replace your name on the account with the name of the trust. Finally, you will also have to name beneficiaries onto your trust. A beneficiary can be any person or entity that the grantor of the trust wishes to receive a portion of their property after they pass away. Furthermore, a trust can name as many beneficiaries as desired and give a different portion of assets to each beneficiary.

Who Controls Assets in a Living Revocable Trust?

A trustee is a person or entity that holds, manages, and eventually distributes property or assets for the benefit of a third party. Because the trustee oversees and manages the assets within a trust, to be able to serve as a trustee in the United States, a person must be at least eighteen years old and not be experiencing any forms of incapacity. 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 You Must Properly Fund Your Trust?

To properly fund a trust, you must remove your name from the title of the property and replace it with your trust’s name. Furthermore, you must designate beneficiaries to your trust who will receive your assets once you pass away. If you do not properly execute these two steps, your trust will not avoid probate. Additionally, your living trust can only control and protect the assets that you transfer into it. Thus, if you control assets yet do not transfer these assets into the trust, your trust cannot control or protect them.

What Happens if You Do Not Transfer Assets Into a Trust?

If you hire a knowledgeable and experienced estate planning attorney, they will create not only create a trust but they will also establish a “pour-over will.” When you pass away, a pour-over will catches any assets that you did not include in the original trust and then it sends it to your trust at the time of your death. A pour-over will does not stop the assets from passing through probate. However, once the assets pass through probate, the trustee will be able to distribute the assets according to the terms of the trust.

This is important as if you do not have a will or trust, you will die “intestate.” If you die intestate, the court will distribute your assets according to state laws. Thus, if you do not have this type of will, assets that you do not place into a trust may not go to the people or entities that you desire.  

What Can my Attorney Do?

In most cases, the grantor will transfer some of their assets into the living trust. Furthermore, your attorney will transfer some of the assets into the trust. Most attorneys will transfer your real estate, then provide you with instructions and sample letters for your other assets. If you hire a knowledgeable estate planning attorney, they should review or create the documents that you need to transfer these documents into a trust. Furthermore, an attorney will be able to explain the procedure and help you decide who should transfer each asset into the trust.

Is it Difficult to Fund a Trust?

With the proper legal guidance, it is not difficult to fund a living trust. Living trusts are one of the most common estate planning tools for families that have assets. Thus, when funding a trust, transferring property titles, or adding the trusts name to your financial accounts will not be met with resistance. For example, a simple short assignment document will be used to transfer the asset. However, other assets might require you to write clear written instructions. The reason for this is that these assets may be difficult to transfer or prone to fraud. Finally, whether you are using an assignment document or have to write instructions, you can typically execute these actions by mail, email, or over the telephone.

What to do if You Need to Prove That Your Trust Exists

Furthermore, certain institutions will want to see proof that you actually have a trust. If this occurs, you should contact your attorney so that they can prepare a certificate of trust. A certificate of trust is a shortened version of your trust that describes the important information. This information commonly includes information that verifies that you actually have a living trust and identifies the trustees and explains their responsibilities. However, a certificate of trust does not discuss any information about the assets within the trust and who your beneficiaries are and their specific inheritances.

Funding a trust is not a difficult process. However, many people that want to create a trust constantly put off hiring an attorney as they focus on other tasks that are important in the moment. However, while a trust may not offer instantaneous benefits, creating a trust is extremely important to your family’s financial future. Before you hire a lawyer to create your trust, you should make a list of your assets, their values, and locations, then start with the most valuable ones and work your way down. Creating a trust in this manner allows you to save money and time while still having the legal representation necessary to properly secure your assets.

What Assets Should I Transfer Into a trust?

Each asset you place into a trust will allow that asset to avoid probate and give the trustee the power to transfer these assets to the proper beneficiaries. Thus, the most common assets that you should place into a trust are real estate, bank, saving, or investment accounts, 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.

Most assets will benefit from being put into a trust. However, the common misconception that you should transfer all of your assets into a trust is incorrect. Certain assets may not be able to go into a trust, would benefit from not being placed into a trust, or your attorney may have a valid reason for leaving an asset out of the trust.

Should I Transfer Real Estate Into a Trust?

In most cases, you should transfer your real estate into a living trust. Furthermore, it may even be easier to purchase new real estate in the name of your trust. However, the one downside to transferring real estate into a living trust is that refinancing property in a trust is not easy. Furthermore, certain lending institutions require that you buy the real estate in your name and transfer it into the trust at a later date.

A living trust is revocable. Thus, transferring real estate to your trust should not disrupt your current mortgage or the payments on this mortgage. 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. Additionally, in most cases when you transfer real estate into a trust, you do not have to reappraise the property. Thus, this will not affect the taxes on the property.  Also, you will still be able to use the capital gains tax exemption when the property sells even if it is in a trust.

Can you Transfer Out-of-State Property Into a Trust?

If you own property in another state or country, transferring the property to your living trust will prevent a conservatorship and/or probate in that state. However, one important note is that you need to hire an attorney who is licensed in the state where your property resides.

Can You Transfer Contaminated Property Into a Trust?

Property that has been contaminated can be placed into a living trust. For example, contaminated property could include a gas station with underground tanks or a printing facility that used dangerous chemicals. While this property can go into the trust, if an incident does occur, the trustee can be held personally responsible if the property must be cleaned up. However, if you designate yourself as your own trustee, if the property must be cleaned, nothing changes. The reason for this is that as the owner of contaminated property, you are already responsible to fix any issues that may occur. One important thing to note is that if clean-up has not been completed before you pass away, your successor trustee and your beneficiaries can also be liable.

Can I Place a Life Insurance Policy Into a Trust?

In most cases, if you have a sizeable estate, you should not place your life insurance policy into a revocable living trust. Instead, you should set up an irrevocable life insurance trust that you place your policy into.

A life insurance trust is a type of irrevocable trust funded solely by a life insurance policy. The reason why life insurance trusts offer benefits is that if you place your life insurance policy in this trust, the trust will own the policy. There are two ways to fund a life insurance trust.

Common Ways to Fund a Life Insurance Trust

First, one can transfer ownership of an existing life insurance policy into a life insurance trust. However, if this is how one chooses to fund their life insurance policy, the policy must be in the trust for at least three years before the trust will be considered to own the insurance policy. Thus, if you create a life insurance trust and place an existing life insurance policy into the trust, yet the person who the trust is for dies within 3 years, the life insurance policy will be subject to the federal estate tax. The other way to fund a life insurance trust is to create the trust and have the trust purchase the insurance policy for the individual. In this scenario, the life insurance policy automatically receives the tax benefits of being in the trust.

A life insurance trust is technically irrevocable. A life insurance trust requires one to pay monthly premiums. Furthermore, if you no longer want the trust with the same policy or you want different beneficiaries to the trust, you could simply stop making payments on the premiums. Thus, the trust would still exist. However, it would have no value as the asset meant to fund the trust no longer exists.  

Can a Trust Own a Vehicle?

A trust can own a vehicle. However, there are two main reasons why you may not want or need to place this asset in a trust. First, if you get into an accident that is your fault, the other parties’ lawyer may notice that the trust owns the car. In this case, they may believe that they will be able to receive a sizeable payout from the estate and are thus more likely to sue you. Furthermore, every state allows a small amount of assets to transfer outside of probate. Thus, if your car is within the estate tax limit, you can easily transfer your car to a beneficiary without having to spend the time or money that comes with transferring the title from your name to the name of the estate.

What about my IRA and other tax-deferred plans?

If you have an IRA or other tax-deferred plan, you should not place these accounts into a living trust. Instead, you should name your trust as the beneficiary-along with anyone else who you would like to receive these assets. The benefit of naming your trust as a beneficiary instead of placing this account in the trust is that the money can continue to grow tax-free yet still be properly distributed when you die.

Spousal Benefits

Most married couples name their spouse as beneficiary for two main reasons. First, the money will be available to provide for the surviving spouse. Second, the spousal rollover option can provide for many more years of tax-deferred growth. After you die, your spouse can “rollover” your tax-deferred account into his/her own IRA. Furthermore, they can 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. Similarly, they can 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 die, the beneficiary can do whatever he or she wants with this money. This includes 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. Furthermore, there is the risk of court interference at incapacity. Thus, naming the trust as the beneficiary to the asset may be the best option. The reason is that you can secure your assets and ensure that the beneficiary will not squander the assets.

What Type of Assets Should I Not Put Into a Living Trust?

If you live in a noncommunity property state and have owned an asset jointly with your spouse since before 1976, transferring the asset to your living trust could cause your surviving spouse to pay more in capital gains tax if he or she decides to sell the asset after you die.

If the asset is your personal residence, this would not be an issue unless the gain is more than $500,000. However, if the property is farmland, commercial real estate, or stocks the exemption limit is different. Other assets that you should not transfer to your trust are incentive stock options, Section 1244 stock, and professional corporations. Each state has different laws concerning living trusts. Thus, you should contact an attorney to see what assets you should not place into a living trust.

Can Property That Doesn’t Have a Title go Into a Trust?

Valuable personal property that does not have a title commonly includes artwork, clothing, and jewelry. However, it can also encompass cameras, sporting equipment, books, and other household goods. If you want to transfer an asset that does not have a title into a trust, contact your attorney. They will prepare an assignment to transfer these items into the living trust.

What if I Purchase New Assets After Initially Funding a Trust?

In most cases, you can purchase property or acquire other assets in the name of the trust. Additionally, if you cannot do this, you can transfer this property into the trust at any time. Finally, a knowledgeable and experienced estate planning attorney can easily help you transfer any of these assets into the trust.

Final Thoughts

Trust and estate laws are complex. This is so no matter the type of trust you decide to establish. As such, it is extremely important to have legal representation that can help you correctly set up your trust. The Antonoplos & Associates trust and estate lawyers have over 20 years of experience helping clients in DC, Maryland, and Virginia. With this knowledge and experience, we can help with any legal issues that occur from setting up your trust.

Furthermore, Peter Antonoplos, founder and managing partner of Antonoplos & Associates has an LLM in Taxation from Georgetown University Law Center. With this knowledge, Peter can help you effectively set up your revocable living trust. Thus, maximizing the tax savings you receive from setting up this account in DC, Maryland, and Virginia.

Finally, below is a review of assets that you should and should not place into a revocable living trust.

Assets that you should transfer into a 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 that you should not transfer into a living trust

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

One final note to understand is that each state has specific laws regarding probate. Thus, you should contact a licensed attorney in your state before setting up or transferring assets into a trust.

Contact Our Law Office for More Information

For more information on how to fund a revocable living trust, contact Antonoplos & Associates at 202-803-5676. You can also directly schedule a consultation with one of our attorneys. Additionally, for general information regarding estate planning, check out our blog.