HOW TO FUND YOUR REVOCABLE TRUST OUTLINE

By Michael J. Howell, Esquire

Copyright 1996-2019

 

For purposes of this Outline, the Grantor is the same as a Settlor in most estate planning documents, whereby the creator ( Grantor or Settlor)  of the Trust is taxable on all the income of the Trust.  The term Grantor is used simply because the Internal Revenue Code and Treasury Regulations refer to these types of Trusts as Grantor Trusts.  They are tax neutral, which means that all income of the Trust is taxable to creator (Grantor or Settlor) of the Trust.

 

In our practice, we use the Term Settlor in all Grantor Type Documents.  If the document refers to a “Grantor” and not to a “Settlor” as the creator of the Trust, the Trust is not likely to be a traditional Grantor Trust, which most Trusts are.  It has more to do with regional customs than to state or federal laws.

 

1.         Real Estate

Legal Requirements

-           Deed/Title to Real Estate

-           Executed according to South Carolina Law

-           Recorded in the records of the County Courthouse in the county where the property is located

-           May require consent of mortgagees if property is mortgaged

-           Avoids "due on sale" problem

-           However Federal Law allows for most grantor trusts and inter-spousal transfers without mortgagee consent

 

Real Estate Attorney Needs

-           Copy of correct recorded deed/title to real estate

-           Copy of executed Trust Agreement

-           Address of Trustee

-           Name, address, telephone number and loan number of mortgagee, if any

-           Certificate of Trust – Drafted by our office or possibly the real estate attorney

 

Action Required by Attorney

-                      Prepare and execute deed transferring title

-                      Record the Deed

-                      May also require filing documents with plantation or subdivision, etc.

 

Action Required by Client

-           File request for Homestead Exemption with county if Grantor is eligible

-           File request for 4% assessment ratio with county if Grantor is eligible

-           Otherwise, can cause substantial and unnecessary increase in property taxes

 

Other Issues

-           Splitting property owned jointly, whether real estate or other Trust property

-           Split ownership first

-           Then each spouse places their interest in their own Trust

-           Avoids possible hyper technical marital deduction arguments and related estate tax arguments

-           Can also produce fractional interest discounts and lower estate tax upon second death

Out of State Property

-           Coordinate with estate planning attorney and out-of-state real estate                  attorney and possibly in-state real estate attorney

 

If Real Estate is Sold

-           Must be by the Trustee(s) as the legal owner(s), if property is in Trust

 

Gift of real estate or any other Trust property after funding

-           Take out of Trust and place in Grantor's name

-           Then Grantor makes the gift

-           Leaves paper trail

-           Avoids possible and very technical IRS arguments

-           No longer necessary due to changes in the law, but still good procedure

 

2.         Personal Property       

-           Titled property

-           Cars and boats

-           Re-register title with proper agency

-           Automobiles

-           Highway Department

-           Boats

-           May be South Carolina Department of Natural Resources

-           May be Coast Guard

-           Obtain lienholder consent anytime any property is subject to a lien

-           Untitled property

-           Household and personal effects

-                      Bill of Sale of all untilted personal property to Trust.

-                      If married, requires multiple bills of sale for clarity.

-                      Bill of sale from spouses to attorney, then bill of sale back to spouse as tenants in common, then each transfer ownership to his or her respective trust or share in a joint trust.

-                      Note relatively new statute provides that such property is presumed to be owned as joint tenants with right of survivorship between spouse, subject to 5 exceptions.

-                      Unfortunately, the 5 exceptions are a big as the tunnel(s) that connects New York City to New Jersey.

-                      Best to place in Trust.

 

3.         Stocks and Bonds

-           Requires re-registration

-           If in brokerage account

-           Broker will need letter of instruction

-           May also require specific firm forms

-           Often Brokers have their own Certificate of Trust, but we prefer use of UTC form

-           If Grantor holds certificates

-           Have to go through transfer agents

-           Specific firm forms, etc.                                

-           Suggestion

-           Open brokerage account

-           Have broker take care of all re-registration

-           Inexpensive and easy

-           Suggest that all securities of a Grantor be held in one brokerage account

-           Provides clean records

-           Inexpensive

-           Review SIPC or insurance other coverage on accounts

-           Make sure you are comfortable with broker’ financial stability

-           Some mutual funds can not be held in some brokerage accounts

            -           Check with your broker

-           To be safe

-           Always give broker a clear letter of instruction that you are placing the assets in a grantor trust and anticipate that the funding is tax neutral and to advise you, if not, and provide  a copy of the Certificate of Trust

-           Can do this for all transfers

-           Makes sure there are no misunderstandings

             -           If broker asks for a complete copy of the trust agreement, tell them it is not necessary

-           If they insist, then it may be acceptable to give them the first page and the signature pages and maybe the pages with the Trustee powers

-           If they insist on a complete copy, then contact us before giving it to them

 

4.         Bank Accounts

-           Requires changing names on all accounts

-           Give the bank a letter of instruction and a Certificate of Trust

-           If banker asks for a complete copy of the trust agreement, tell them it is required under South Carolina Law

-           If they insist, then it may be acceptable to give them the first page and the signature pages and maybe the pages with the Trustee powers

-           If they insist on a complete copy, then contact us before giving it to them  

-           Will need social security number of Grantor, if a Grantor Trust

-           Will need taxpayer identification number, if not a Grantor Trust

-           May need assignment forms for certificates of deposit, but not likely

            -           Check to see if any early withdrawal penalties

            -           If there are any, may want to wait until they mature

-           Will also have to complete and sign other bank forms, depending upon the bank

 

5.         Safe Deposit Boxes

-           Similar to requirements for bank accounts in general

-           Can also name deputies (agents) who can enter safe deposit box, depending upon the bank

-           Can take out or add contents

-           Deputy's authority terminates with the death or incompetency of person who appointed him or her

-           Successor Trustee can close safe deposit box and open a new one, after death or permanent disability of the Grantor who is also the original Trustee

 

6.         Life Insurance

-           Change beneficiary

-           Change of ownership is not required

-           Standardized beneficiary forms are available from all the way back in the 1960’s

-           Not accepted by all insurance companies

-           Probably best to use specific company forms

            -           Some companies have special forms if trusts are involved

-           If you have a local agent

-           Let him or her process the change of beneficiary forms

            -           Very cost effective

-           If you do not have a local agent

-           Call company to obtain forms

            -           Better yet, obtain name of local agent

 

7.         Annuities

-           Requires assignment

-           No standard forms

-           Need specific company forms

-           If annuitant, owner and beneficiary are not the same

-           Don't change anything without consulting estate planning attorney and/or CPA

-           Can be serious tax consequences

-           Assuming annuitant, owner and beneficiary are the same

-           Change beneficiary to owner's Trust

-           There are risks in changing ownership of annuities, even to a trust

-           You should never place an annuity, which includes a commercial annuity, pension, profit sharing plan, 401K or IRA, just to name a few, into your trust without a letter from us or your CPA saying to do so

            -           Changing the ownership to trust can trigger immediate ordinary taxation

            -           Changing the beneficiary can have adverse income tax result, later on

 

8.         Notes and mortgages owned

-           Requires assignment

-           Requires real estate attorney

 

9.         Limited Partnerships

-           Requires assignment

-           Normally requires consent of general partners and others

-           Write a letter to general partner requesting transfer to Trust

-           Often time-consuming

-           Often not easy

-           Probably requires an attorney

 

10.       Closely held corporations and LLCs

-           Must re-register stock or LLC membership with company or with company transfer agent

-           Often small closely held companies do not know what to do

-           Can be time consuming

-           Can be very expensive when compared to traded securities

-           Probably requires an attorney

-           Be careful if an S Corp

            -           Special trust rules apply and special trust language is needed

                       

11.       Tax Aspects

-           Revocable Living Trusts are Usually Grantor Trusts

-           If Grantor is Trustee or Co-Trustee

-           No separate tax return required

-           All income and expenses are reported on Grantor's  personal income tax return

-           No taxpayer identification number needed if Grantor is also the Trustee or Co-Trustee with spouse

-           Use Grantor's social security number

-           $250,000/$500,000 gain exclusion available

-           If Grantor otherwise qualifies

-           If Grantor is not Trustee or Co-Trustee

-           Grantor Trust tax return or other reporting requirements must                                                                                               be met

-           Need separate taxpayer identification number