FUNDING LIVING TRUSTS: CHANGING TITLES AND BENEFICIARIES

More people are choosing a revocable living trust instead of a will or joint ownership for their estate plans, a trend driven by the cost and time savings that a trust offers as well as the added control over assets that a living trust provides.

However, many people make a mistake that can render their trusts useless. That mistake is not changing titles and beneficiary designations to the living trust.

This process, called "funding" the trust, is probably the most important part of setting up a living trust. If you have signed your living trust document but, due to procrastination or bad advice, you haven't changed titles and beneficiary designations, then you've wasted your money. Until you fund your trust, it doesn't control anything.

From the start, you should hire an attorney who has earned your confidence to prepare your trust. And you should know, before your trust is set up, how much of the funding process the attorney will do. The most conscientious attorneys will do all the funding--they want clients' trusts to be as effective as possible, so they personally make sure everything is put into the trust properly. However, this can be costly.

Depending on how much the attorney charges, how comfortable you are with the process, how much time you have, and how interested you are in keeping your costs down, you may want to re-title many of your assets yourself.

If you take this approach, most attorneys have pre-written letters you can send to your bank, investment broker, insurance company, and so on, telling them how your assets should now be titled. At the least, your attorney should give you very specific instructions and the exact wording to use for titles and beneficiary designations.

The good news is that most titles and beneficiary designations are not difficult to change. Some are done by using documents prepared by your attorney, others will require written instructions from you, and some institutions have their own forms that you will need to complete. Most changes can be handled through the mail and by telephone. Some institutions will require your signature to be notarized or guaranteed.

Even though the process itself is not difficult, it will take some time. How much time will depend on how many titles and beneficiary designations you have to change and how quickly the institutions respond. This article describes how titles and beneficiary designations are changed.

REAL ESTATE

Depending on the state in which the property is located, a correction deed, grant deed, warranty deed, assignment, or quitclaim deed will be used to change the titles of real estate to your living trust.

The new deed will include how the property is titled now (before you put it into the trust), what the new title should be (to put it into your trust), and the legal description of the property. The deed for each property will be signed by you, witnessed, notarized, and recorded in the county where the property is located.

Your attorney will probably put your home in your living trust for you at no extra cost. This is usually a good idea since the home is the most valuable asset most people own, and the legal description and titles must be exact.

If you own property in another state, you will want to transfer it to your living trust to prevent a conservatorship (guardianship) and/or probate there. Your attorney can contact a title company or an attorney in that state to handle the transfer for you.

While it may be more convenient (and wise) to have the local attorney or escrow office handle the transfer for you, you may also be able to do part (or all) of it yourself. First find out what is involved--check with an attorney or escrow office in that state to find out the proper form to use, to verify the process, and to get the name and address of the recording office.

In some states, your trust may have to be recorded--if so, a Certificate of Trust should be all that is needed. This is a shortened version of your trust that verifies the trust's existence, explains the powers given to the trustee(s), and identifies the successor trustees. But it does not reveal confidential information like your assets, your beneficiaries and their inheritances. Your attorney may call it by another name, but he or she will know what needs to be prepared.

Your Mortgage: Putting real estate--especially your home--into your living trust should not disturb your current mortgage in any way. Even if the mortgage contains a "due on sale or transfer" clause, re-titling your home in the name of your living trust should not activate the clause. (If you own rental property or commercial real estate, it would be a good idea to contact the lender before you transfer the property and get their approval so you do not inadvertently activate the clause. The lender may charge a small fee to approve the transfer.)

Since living trusts have become so popular, Fannie Mae, Freddie Mac and Ginnie Mae (which buys FHA home mortgages) all now consider a revocable living trust to be an "eligible borrower" as long as "normal" guidelines are met. For example, the property must be owner-occupied, the trustee must be authorized to borrow against the property, and the owner should be a trustee, which most people are anyway. These recently published guidelines will make it much easier to transfer your home into your living trust, to refinance your home after it is in your living trust (without having to temporarily remove it from the trust), and even to purchase additional real estate in the name of your living trust.

Transferring real estate to a living trust should also not cause your property to be reappraised because the underlying ownership is the same (it's your trust) and because the trust is revocable (you can take the property out of your trust and put it back into your individual name at any time). Even so, you may need to notify the tax assessor's office.

Generally, a transfer tax is charged whenever property is sold. Putting real estate into a living trust does not constitute a sale, because you can take the property out of the trust at any time. So, in most states, there will be no transfer tax when you transfer property to your living trust. However, a few states and counties are looking for creative ways to raise revenues and may charge a transfer tax anyway.

Homeowner's Exemption From Creditors: Some states exempt part or all of the value of your home from creditors' claims. Ask your attorney if your state has a homeowner's exemption, how much it is, and if transferring your home to your living trust will affect it. If the exemption is significant and putting your home in your trust would cause you to lose the exemption, it may be possible to prepare the deed transferring your home to your living trust--but not record it until you become incapacitated or die. So you could have the benefits of a living trust and the exemption.

Homeowner's, Liability, and Title Insurance: Your homeowner's and liability insurance should be changed to reflect your living trust on the title and the trustees as additional insureds. (If you are your own trustee, it will show you as trustee instead of you as an individual.) Your insurance agent will be able to make this change for you (probably at no charge). Usually all the insurance company will need is a letter of instruction from you and a copy of the new deed.

Title insurance should also be changed. Just check to make sure your title insurance company will still insure title when your living trust is the owner of the property (most will).

LIFE INSURANCE

In many cases, you will want your living trust to be both the beneficiary and the owner of your insurance policies.

Naming your trust as the beneficiary gives you maximum control over the proceeds. It keeps the courts from getting involved if your loved ones are incapacitated, die before you (or at the same time as you), or are minor children. You can keep the proceeds in the trust until you want your loved ones to receive the money. You can be sure the money is used to pay your final expenses. And by naming your trust instead of your spouse as the beneficiary, you can even keep control of the funds if your spouse should remarry.

(Note that if you live in a community property state and the insurance was purchased with community property funds, your spouse is entitled to half of the proceeds--and may need to sign a consent form if you want to name your living trust as beneficiary.)

Naming your trust as the owner of your policies gives you maximum control over the policies and more flexibility. For example, if you name your spouse or someone else as the owner, you might worry that they will cancel the policy or change the beneficiary.

If you have a policy that has a cash value and you name your trust as the owner, your successor trustee would be able to borrow on the policy at your incapacity to help pay for your care. And if you suffer from a terminal illness, your successor could apply for a "Living Benefit," currently offered by many insurance companies.

However, if you are single and your net estate is more than $600,000, or if you are married and it is more than $1.2 million, you should probably consider having a life insurance trust (or other arrangement, like a family limited partnership) to save estate taxes.

If your employer provides you with life insurance (including split-dollar insurance), accident insurance and/or disability insurance, your living trust should be the beneficiary when you have the option. Your employee benefits department or personnel department will have the appropriate forms and can help you complete them.

DEBTS OWED TO YOU

If you have "owner-financed" any assets, loaned someone money, or have any other notes payable to you, you will need to assign these mortgages/loans to your living trust by an Assignment (a document prepared by your attorney). It is signed by you only (not the other party), notarized and attached to the original document. If the original mortgage was recorded, some attorneys will also record the assignment.

If you have loaned someone money without documenting the loan, this would be a good time to put it in writing to prevent disputes over the terms and nature of the loan. Write up the terms of the loan and have it signed by the other party. An Assignment can then be prepared to transfer the loan to the trust.

BANKING ACCOUNTS

Checking, Savings, and Pay-on-Death Accounts: You will need to change the ownership of your checking and savings accounts to your living trust. New signature cards will then need to be signed by the trustee(s). If you are your own trustee, you can sign the signature cards with just your usual signature.

You may need to sign new account agreements. Some institutions will require a new account, with a new account number and new checks. If you are your own trustee, the information on your checks does not need to change--they can still be printed with just your name, address, and telephone number on them--and you continue to sign checks the same way you always have.

If you have named beneficiaries on any accounts, you'll want to change them to your living trust. For example, you may have established an account and named your spouse, child, or grandchild as the beneficiary. These are called "Totten Trusts." The account title probably includes the words "in trust for" (or "ITF"), "as trustee for" (or "ATF"), "payable-on-death" (or "POD"), or "transfer on death" (or "TOD").

By changing the beneficiary on these to your living trust, you prevent the possibility of the court taking control of the funds if your beneficiary is a minor or incapacitated when you die, or dies before (or at the same time as) you. The institution will probably have its own form to change the beneficiary.

To change the ownership or beneficiary of an account, the institution will probably ask to see a copy of your trust document. This is for their protection--and yours. Quite simply, they do not want the liability of changing titles on your assets unless they are sure the trust document is valid, they know who the trustee is and what powers the trustee has, and that this is what you want. However, you should not have to show them your entire trust document. A Certificate of Trust should satisfy their requirements.

Safe-Deposit Boxes: You will need to change the box authorization card to your trust and the trustee(s) will need to sign the card. This will allow your successor trustee to have ready access at your death or incapacity. Your bank or savings and loan officer can help you do this.

FINANCIAL INVESTMENTS

Certificates of Deposit: These should be re-titled in the name of your trust. If your CD lets you name a beneficiary, the beneficiary should also be your trust. You need not cash these in to do this.

Some institutions will re-title the certificates immediately with no penalties. If yours requires you to wait until the certificate matures, you can go ahead and change the beneficiary and use an Assignment to transfer your ownership interest to your trust. Then, when the certificate matures, you can change the title to your trust before you renew it.

Note, however, that this process does not apply to individual retirement accounts (IRAs) that are invested in CDs. We discuss IRAs and your living trust later in this article.

Stock, Bonds, and Mutual Funds: If you maintain an account in the name of your bank or brokerage company (called a "street account") or invest in a mutual fund, they will need written instructions from you to change the name on your account to your trust.

Call them first to see if you should send a letter of instruction (remember, your attorney will probably include sample letters with your trust) or if they have their own form they can send you. Also find out if they have their own procedures you will need to follow. They may request that your signature be guaranteed; if so, your local banker or broker can probably do this for you (just call ahead to check). They may also ask to see a copy of your trust document (again, the Certificate of Trust should be all they need).

If you have possession of actual stock and securities certificates, you can set up an account at a brokerage house or other financial institution. They will transfer the titles to the name of your trust and keep the certificates for you. This way you do not have to worry about misplacing them, losing them in a fire, or making frequent trips to your safe-deposit box.

If you are more comfortable keeping the actual certificates yourself, you will need to have new certificates issued in the name of your trust. (Never write or mark on an original stock or bond certificate.) Your broker or banker can have them reissued for you (they may charge a small fee).

You can also do this yourself. Your attorney can prepare a "stock power"--a short document that assigns the securities to the trust, identifies what is being transferred (for example, 50 shares of General Electric stock), the certificate numbers, and the name(s) of the trustees. You'll sign the stock power and have your signature guaranteed.

You'll then need to locate the stock transfer agent. This is the organization that is authorized to transfer title on stocks and bonds. For bonds, the transfer agent is usually the institution from which you receive payments on the bond. If you have stock certificates, don't rely on the name of the transfer agent on the certificate--it may be outdated. Call a brokerage house and ask them. Your attorney may also be able to find out the transfer agent for you.

Send the transfer agent a letter by certified mail, instructing them to issue new certificates in the name of your trust; a Certificate of Trust; and the certificates. Send the stock power separately, also by certified mail. (Do not send the stock power and the certificates together in the same envelope--if someone intercepts them, they would be able to negotiate them.) Make sure you keep copies. And check the new certificates as soon as you receive them.

If you have lost a certificate, contact the transfer agent and request an "Affidavit of Lost Certificate and Indemnity Agreement." Complete and sign the affidavit and follow the instructions to furnish bond.

Savings Bonds: Series E, EE, H, and HH bonds can be transferred to your living trust with no adverse tax consequences. You will continue to receive current income from Series H and HH bonds. Accrued interest on Series E and EE bonds can continue to be deferred until the bond matures.

To have savings bonds re-issued in the name of your living trust, you'll need form PD-1851. If you have named a beneficiary on a savings bond, you can also change it to your trust using Form PD-4000. (If you are changing a beneficiary on a Series E bond, the current beneficiary will need to sign the form; if this person is deceased, you will need to send along a death certificate.) You can call the Federal Reserve Bank customer service to order forms at 1-800-245-2804.

PERSONAL PROPERTY

Autos, Boats, and Other Vehicles: Most states will permit a vehicle title to be re-issued in the name of your trust. Also, some states now allow you to name a beneficiary for your vehicle. If yours does, your trust should be the beneficiary.

In some states, however, re-titling a vehicle in the name of your trust will require the payment of an excise (transfer) tax, just as if the trust had purchased it. You may want to call your state's license bureau to find out the process where you live. Depending on the costs involved and the value of the vehicle, you may want to wait until you purchase your next one and title it in the name of your trust.

If the value of the vehicle is within the amount your state allows to transfer without probate, your attorney may even suggest that you leave your vehicle out of your trust. (Most states allow very small estates--some as low as $15,000--to transfer without probate.) Also, if you are using a corporate trustee, they may not want to manage your car--unless, of course, it is of considerable value.

If you do title a vehicle in the name of your trust, notify your insurance company so they can change your policy to reflect the change of ownership and list the trustee as an additional insured. They may request a copy of the new registration and a letter of instruction from you. They will probably make the change for you at no charge.

Personal Untitled Property: Many attorneys will probably prepare either a Bill of Sale or an Assignment to transfer personal property (like your furniture, artwork, clothing, jewelry, cameras, sporting equipment, books, etc.) to your trust. If these articles are of substantial value, you would want them in your trust. However, if the value of these articles is low enough that a probate would not be required in your state, your attorney may recommend leaving these out of your trust.

BUSINESS INTERESTS

Sole Proprietorship: Business licenses and DBAs ("doing business as") should be changed to show your living trust as the owner. An Assignment is used to transfer business property to your trust.

Closely Held Corporation: Check to make sure that transferring your interests to a living trust will not trigger a buy-sell agreement. (If it does, you can request that the document be changed.) The appropriate corporate records will then need to be prepared to transfer title. Share certificates will also need to be re-registered in the name of your trust. To do this, a Stock Power (prepared by your attorney) and the certificates will need to be sent to the attorney or officer who handles the transfers.

Buy-Sell Agreement: As long as there is nothing in the agreement that prohibits it, a buy-sell agreement can be assigned to your trust (by using an Assignment).

Subchapter S Corporation: With a subchapter S corporation, both the earnings and any losses of the corporation are passed through to the owners personally. Earnings are taxed only once at the personal level and any losses can be deducted from ordinary income.

Transferring subchapter S corporation stock to your living trust does not cause any change or any problem while you are living. After you die, however, the stock can stay in your living trust for up to two years--after that, it would lose its "S" status and become a "C" corporation.

But this rarely happens. Two years is usually plenty of time to distribute the stock to the beneficiaries so the "S" status can be retained. If you don't want your beneficiaries to receive the stock outright, the IRS also allows it to be transferred to other trusts that meet its qualifications to retain the "S" status. Your attorney should plan for the distribution of subchapter S stock when he prepares your living trust document.

Limited Partnership/Corporation Interests: If you are involved in any real estate or other partnerships or corporations, your interest should be assigned to your trust. This probably will not disturb the existing agreement or affect your partners in any way, but you should check the partnership agreement or corporate by-laws just to be sure.

The general partner may already have a form to assign your interest to your trust. If not, your attorney can prepare one. The Assignment should identify your interest that is being transferred, how the interest should be titled, and that the trustee accepts any liabilities as well as benefits.

Send the Assignment to the general partner with a letter instructing him/her to make the transfer. Since other documents may need to be prepared to complete the transfer, you may want to give the general partner a limited power of attorney to sign the other documents for you. (The general partner may charge a fee to do this.)

General Partnership Interests: This transfer is handled in the same way as a limited partnership. However, your signature will probably need to be notarized, and the Assignment should include that the other partners consent to it. The partnership agreement may also require you to send the Assignment to the other partners or general partner to sign (as verification of their acceptance) and return the Assignment to you. If you are using a corporate trustee with your trust, it may not be able to serve as a general partner. A special trustee may have to be appointed instead.

ASSETS REQUIRING SPECIAL CONSIDERATION

While you should start with the general premise that all titles and beneficiary designations should be changed to your living trust, there are a few assets that you may not want in--or that cannot be placed into--your living trust.

IRA, 401(k), Pension, Profit Sharing and Keogh Savings Plans: These are called tax-deferred plans because you did not pay income taxes on this money when the contributions were made. The income taxes are deferred until you withdraw the money at a later time--ideally, at your retirement when your income (and tax bracket) is lower. But, sooner or later, the income taxes must be paid.

You will not be able to change the ownership of these plans to your living trust, but you can change the beneficiary. Most married people, especially those who have been married for some time, name their spouses as beneficiary of these plans. The main reason is that a spouse is able to "roll over" the proceeds into his or her own IRA, further delaying payment of taxes until age 70 1/2--and many married couples usually want this money available to the surviving spouse. Of course, this means that your spouse will then have full control of the proceeds (which may not be what you want). You also risk the court taking control of the funds if your spouse is incapacitated when you die.

If you name your living trust as the beneficiary, you can keep more control. But there are some tax disadvantages. For example, a living trust is not entitled to the roll-over option--so income taxes must be paid when the proceeds are paid to your trust (after you die). Because of this, many people name their spouse as the first beneficiary, and their living trust as the second beneficiary.

However, if you have children from a previous marriage, are afraid your spouse may be too easily influenced by others after you're gone, or simply have another reason why you may not want your spouse to have these proceeds, there are some other options you may want to consider, such as naming an irrevocable trust, a Q-TIP trust (C trust) or a charitable remainder trust as beneficiary.

However, anytime you name someone other than your spouse as the beneficiary, you need expert advice. Many of the existing laws are unclear, and the laws are constantly changing. You'll need to find an attorney who is experienced in this area, especially if you have large amounts in these plans. (Your spouse may also need to sign a consent form. Even in non-community property states, spouses now have rights to retirement plans and other benefits.)

Note that without proper planning, income, estate, and other taxes can take up to 85% or more of your tax-deferred plans before they ever reach your beneficiaries.

If you are not married, your decision will be a little less complicated. You can name an individual, an organization, your living trust, or an irrevocable trust as the beneficiary of your tax-deferred plans. Many single people name their living trusts as beneficiary. This gives you maximum control over the proceeds, gives you the ability to shield the proceeds from a beneficiary's potential creditors and ex-spouses, and keeps the courts from getting involved if your beneficiary becomes incapacitated, dies before you (or at the same time as you), or is a minor.

However, if the assets in your tax-deferred plans are substantial, your attorney might suggest an irrevocable trust, a charity, or your own foundation. You will want to discuss your options with an attorney experienced in this area and choose your beneficiary carefully.

To change the beneficiary of plans sponsored by your employer (like a 401(k), pension, or profit sharing plan), contact your employee benefits department or personnel department for the proper form. To change the beneficiary on your IRA or Keogh, you will need to contact the institution where your account is located.

Professional Corporations: State laws require shareholders of professional corporations (like doctors and dentists) to be licensed members of their professions. Since a living trust is revocable and you keep control of the assets you put in it, some attorneys feel that transferring a professional corporation to a living trust would not be a problem. But because the laws do not specifically mention living trusts, many attorneys suggest that you leave these out of your trust for now--at least until the laws are changed to include living trusts.

THE FINISHED PRODUCT

If you decide to do most of the funding yourself, make it a priority and keep going until you're finished.

Copyright © 1998 Auerbach & Gussin