Explaining the Importance of Trust Funding

 Posted on October 28, 2022 in Estate Planning

What is a Living Trust and What Does it Do?

A "living" trust (sometimes called an "inter vivos" trust) is a trust you create while you are alive. A trust is a fiduciary (legal) arrangement that allows a third party (called the trustee) to hold title to assets (property) on behalf of certain beneficiaries. As holder of the title, the trustee is subject to the condition of keeping or using the trust property for the benefit of the beneficiary. The creator of the trust selects the beneficiaries of the trust property. Those who were selected as beneficiaries will receive the trust property when the creator of the trust dies.  

Probate Court

A trust has a similar function to a will but is often a much better choice for a person looking to control what happens to their property after they pass because a trust avoids probate, where a will is always subject to probate. Probate is the legal process that a person’s estate must go through when they die either with a last will and testament or when they have no legal estate planning documents stating how they wish their estate to be distributed (this is called intestate). Probate court oversees the transfer of the estate’s property to the deceased person’s heirs, according to state law. Probate court is often time-consuming and costly because of court costs and attorney’s fees. Attorney’s fees for a probate case vary drastically depending on several factors, however, the average amount for attorney’s fees in probate cases in Illinois is anywhere from $2,500-$5,000. This amount does not include court costs, filing fees, or other fees associated with the court itself. 

Types of Trusts (Revocable vs. Irrevocable)

As part of their estate planning, many people create a “revocable living trust.” These trusts can be modified or revoked at any time. Typically, the creator of a revocable living trust would name themselves as the trustee of the trust and, as a result, the creator of the trust would retain control of the trust and its property for life. The trust creator would also select a second person who will take over and manage the trust after their death. This person is called the “successor trustee.” On the other hand, some people create an “irrevocable trust.” This type of trust cannot be revoked or modified once it is signed. Irrevocable trusts can be useful tools for specific goals (like reducing taxes), but they require giving up ownership and control of trust property.

Further, when two people are married, they have the option of setting up a joint trust. If the trust is a joint trust and one spouse dies, the surviving spouse would assume the role as trustee and the named successor trustee would only take over upon the death of both spouses. 

General Overview of the Trust Funding Process

Though the process is explained in detail below, a quick overview of the trust funding process goes as follows: First, the trust documents are executed, and you are informed how to fund your trust and why it is of such importance. Second, we will schedule a trust signing meeting and your attorney will remind you it is time to begin the trust funding process. Third, you will sign and return to your attorney the appropriate financial form (this form indicates which assets will be transferred into your trust, among other required information). For each asset to be transferred, we will prepare a letter that will be sent to the appropriate holder of the asset (for example, your bank or your life insurance policy holder) and the letters will be given to you, which you will then send out.

How Do I Fund My Trust Once it is Created?

For your revocable living trust to function properly, it must be fully and properly funded. This is because an unfunded or partially funded revocable living trust does not avoid probate. Failure to fund a trust can led to unnecessary problems down the line that can be costly and time-consuming, defeating the entire purpose of the trust. For this reason, it is crucial that you have experienced, and dependable legal counsel guide you in funding your trust. 

General Instructions for Trust Funding

Note: This article provides general knowledge and an overview of trust funding, it does not comprehensively address every type of transfer. This is again why it is important to have an attorney assist you with this process. 

There are two main steps you must take to fund your trust: 

1. You must make ownership changes to the title of most of your assets. Specifically, you must change the ownership from your name as an individual to your name as trustee of your revocable living trust.

2. For other assets, such as life insurance and retirement accounts, you must make beneficiary changes so that those assets are properly distributed upon your death. The beneficiary will not necessarily be your revocable living trust (please see the “Retirement Plans and Life Insurance Policies and Annuities” sections of this document for more information).

How Do I Transfer Assets into My Trust?

To transfer assets to your trust, you must execute new documents of title, deeds to real property, and signature cards for your bank accounts, as well as change of beneficiary forms for pension plans, individual retirement plans and life insurance. Your financial advisor, accountant, broker, or life insurance agent may need to help you make ownership or beneficiary changes. 

You should title all your currently owned and newly acquired assets in the name of your trust.

Using Your Certification of Trust

At the creation of your revocable living trust, we will give you a certification of trust. This document will 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.

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 should provide them with a copy of your certification of trust. Your certification of trust provides only the information that the person you are dealing with needs to see, without disclosing confidential details. 

Your Tax Identification Number

If you are acting as trustee of your revocable living trust, you do not need to obtain a separate tax identification number for your trust or file a separate trust tax return. The Internal Revenue Service (IRS) prefers that you use your own Social Security number. The specifics for reporting your trust income to the IRS will be determined and discussed with you by your attorney.

Upon your death, 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. We will work with your successor trustee and your accountant to see that your heirs get the full benefit of your estate planning upon your death.

What Should I Do After My Trust is Funded?

We recommended that you keep copies of all written documents which evidence the interest of your trust wherever your important documents are stored. These assets may include your accounts, real property, business interests, insurance policy proceeds, or any other property. Once you have successfully transferred a piece of property into your trust, the last step should be to place a document that proves your trust is the owner or beneficiary of that asset with your trust documents. 

How Do I Transfer Specific Assets?

The process of transferring an asset can vary depending on what type of asset is it. Below are the most common types of assets and a general overview of the transfer process.

Cash Accounts

You should sign new signature and ownership cards to retitle any sizeable bank accounts or cash equivalents, including treasury bills, money market accounts, and certificates of deposit. These new signature and ownership cards will allow you to name yourself as trustee of those accounts. You do not need to change any small joint or other checking accounts used primarily for household expenses.

Before you re-title your certificates of deposit, consult with a bank officer to make sure that the institution you are transacting with does not consider the change in account name to be an early withdrawal that incurs a penalty. This should not be a problem because your tax identification number for the account will remain the same.

You can instruct your financial institution by letter or in person to change the title to your trust. The tax identification number (your Social Security number) on the account for withholding and reporting purposes will remain the same. For joint trustee trusts, be sure to give each trustee signature power with respect to the account. Sign the new signature cards as trustees.

Re-titling the account records should have no effect on the name you wish to have printed on your checks. There is no reason to have the name of your trust on your printed checks. Ask your bank to continue to print your individual name on your checks.

After changing title, your next account statement will confirm the re-titling by listing you as trustee of your trust. If this does not occur, we recommend following up with your institution to ensure that the requested change was made. 

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 this is the same as the procedure for re-titling cash accounts (explained above). You may have to complete new account applications and present a copy of your Affidavit or Certification of Trust to change the title. The title to the accounts should be in the trust name.

After changing title, your next account statement will confirm the retitling by listing you as trustee of your trust. If this does not occur, we recommend following up to ensure that the requested change was made.

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:

1. Open a brokerage or investment account in the name of your revocable living 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 living trust will prove your ownership of the transferred stock or bonds.

2. Work directly with the transfer agent for the stock or bond and direct the agent to reissue your stock with your revocable living trust named as the new owner. 

Stock Options

Transferring or assigning stock options requires a careful analysis of the tax and legal issues. We recommend you ask your Certified Public Accountant (CPA) and your stock plan administrator about how to assign your interests to your revocable living trust. If you would like us to assist you, we would be willing to do so under a separate representation agreement.

Personal Effects

Tangible personal property refers to items such as household furnishings, appliances and fixtures, art, motor vehicles, pictures, collectibles, clothing, jewelry, books, sporting goods, and hobby paraphernalia. Your tangible personal property has been transferred to your revocable living trust by declaration in Article One of the trusts.

Your personal vehicles can be titled in the name of your revocable living trust, but we find that most of our clients prefer to leave their vehicles outside their trust for several reasons. One, if they have a vehicle accident, the fact they have a revocable living trust could cause the other parties to the accident to assume they have deep pockets and encourage a lawsuit. Second, heirs can usually transfer vehicles without formal probate proceedings. If you decide to title your vehicle in the name of your trust, consult your casualty insurance agent to make certain the transfer will not result in a business rating on your insurance policy that would increase your premiums.

Retirement Plans

You should never transfer the ownership of a qualified retirement plan, pension plan, or individual retirement account into your revocable living trust. Instead, if you have pre-retirement death benefits under such a plan, our general recommendation is that you choose from among your spouse, children, or partner as primary and contingent beneficiaries.

Making the proper beneficiary designations for retirement plans involves many complex tax and family issues. Therefore, making a recommendation without further consultation is difficult. There are many trade-offs to consider when naming your beneficiaries, and these trade-offs may affect your required minimum distributions and the taxation of your benefits after your death. If you would like to discuss the issues and solutions for designating your retirement plan beneficiaries to best match your unique goals, we would be happy to do so. However, this additional planning must be done under a subsequent written representation agreement.

Once you alter the beneficiary designation on your retirement plans, your retirement plan administrator should send you a letter confirming the change of beneficiaries in your retirement plan records.

Qualified Tuition Plans (529 Plans)

Transferring a 529 plan into your revocable living trust often makes sense, so long as your trust contains specific language enabling the trustee to manage the account. We recommend that you contact us before naming your trust as an owner of a 529 plan.

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 living trust. We can help you determine the proper ownership and beneficiary designation for each policy.

Before deciding to name your revocable living trust as the beneficiary of a policy, there are several points you should consider:

• Your policy beneficiary designation, not your will and revocable living trust, controls the disposition of the policy benefits.

• You should designate your revocable living trust as the beneficiary of your life insurance policies so the policy proceeds will be governed by the terms of your trust. To do so, we recommend you advise your insurance agent that you want your revocable living trust to be the beneficiary. Your agent will make the change for you or provide you the beneficiary designation form for you to complete.

• If you name your trust as the primary beneficiary, you should name your spouse, partner, or children as the secondary beneficiary.

Each insurance company will have its own preferred format for designating your revocable living trust as the beneficiary. Here is a typical format:

• Primary Beneficiary: The [Grantors Name] Living Trust dated [Trust Signing Date]

• Secondary Beneficiary: Spouse, partner, children, or other heirs.

Your insurance company should send you a letter confirming the change of beneficiaries in your insurance policy or annuity records. If they do not do so, we recommend following up with them. 

Mortgage, Notes, and Other Receivables

If you have loaned money to anyone, you should assign your interest as lender to your trust by a written document and notify your debtor of the assignment. We can prepare assignment documents for each interest for your signature.

Partnership Interest

If there are no restrictions in your general partnership agreement, your interest in the general partnership should 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.

We can prepare assignment documents for each interest for your signature.

Corporate Business or Professional Interests

You should contact your corporate counsel or ask us to assist you in transferring your professional business interests into your revocable living trust. The process for transferring your professional business interests into your trust differs depending on the type of business you own. 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 living trust. If your business is a limited liability company, we will draft assignment documents to assign your interest to your revocable living 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 living trust through a written assignment of interest. All items of tangible personal property should 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. If you own the interests, you should record a deed that titles your interests to your trust. If your interest is a lease, you should assign your rights as a lessee to your trust by a written assignment.

Real Property

Transferring your real property to your trust will require attention to ownership and tax issues based on the nature of the current title to the property. The transfer will require preparing, executing, and recording new deeds for each property. This should be done through an attorney. At your request, we would be happy to assist you with this process.

Anticipated Inheritance, Gift, or Lawsuit Judgment

If you are the beneficiary of an estate of someone who has already died, or if you are a plaintiff in a lawsuit, you can assign your interest in the estate or lawsuit to your revocable living trust in case you are disabled or deceased before receiving distributions or payments.

How Often Should I Review My Estate Plan?

You should review your estate plan with an attorney every two to three years, as all estate plans require on-going maintenance. A change in your family, an increase in your net worth, or a change in the tax law could significantly alter the effectiveness of your plan. 

Experienced, Reputable Living Trust and Estate Planning Attorneys in Kendall County

As a general matter, estate planning is strongly recommended for everyone. Without a proper plan in place, the process of settling a person’s estate after they die can be emotional, costly, and overwhelming for the loved ones that are tasked with doing so. Planning of time can help protect beneficiaries of your property, reduce the amount of taxes taken by the IRS when transferring assets, and helps to eliminate family disputes that can arise during the distribution of an estate. Hiring effective and experienced estate planning council is critical so that you know you are making the best decision for yourself and your family and that it is being done properly, according to the law. At Gateville Law Firm we have the proper knowledge and experience assisting those in Yorkville, Oswego, Plainfield, Aurora, Joliet, Plano, Bristol, Newark, and other areas in Kendall County, Illinois with determining and creating the best estate planning option for you. Contact us today at 630-780-1034 or contact us via email.