Back in November, I wrote about some basic considerations that are involved in establishing a trust. In my continuing effort to educate you, my loyal readers, on what I do and why it matters, this month I’m going to go a little deeper into the workings of a typical trust, by explaining what it means to “fund” a trust.
When you establish a trust, the purpose is usually to facilitate the management, and eventual distribution, of assets. To make that work, there must be assets that are owned by the trust. Transferring assets to a newly established trust is, in estate planning lingo, “funding” the trust.
You don’t always transfer assets to a trust immediately after the trust is created. Sometimes there are reasons to delay that step. In some situations there is a document that spells out the terms of a trust, but the trust isn’t actually established until the happening of some later event.
Ordinarily, however, when a revocable trust is established, the objectives of the trust will be best achieved by transferring assets to the trust immediately. How is this accomplished?
Ownership of real estate is transferred by the owner executing and recording a deed. Transferring real estate to a trust is no different.
For a typical revocable trust, the owner of the property transfers it from herself in her individual capacity, to herself as trustee of the trust, by executing and recording a deed that says just that. That’s all there is to it.
Changing the ownership of financial assets, like bank accounts and brokerage accounts, to make a trust the owner is usually simply a matter of the account owner completing whatever forms the financial institution requires. Typically, but not always, the financial institution will also want a copy of the part of the trust that identifies the trustor (the person establishing the trust) and the trustee.
With some assets it’s a little harder to change the ownership. One example is stock certificates. Not many people own shares in publicly-traded companies by holding the certificates anymore. It’s far more common for the shares to be held in a brokerage account. Occasionally, however, there will be a need for this type of transfer. It usually involves sending the certificate to the “transfer agent” (the financial institution that handles stock ownership records for the company), with an instruction signed by the owner of the shares, telling the transfer agent to change the ownership. The signature on those instructions usually must have what’s called a medallion guarantee. It’s cumbersome, but manageable.
Bonds, particularly government bonds, have their own rules. As with stock, it’s rare anymore to have bonds held outside of a brokerage account.
The point of all this is that when you establish a trust for the purpose of distributing assets to your beneficiaries, you have to make the trust the owner of the assets or it doesn’t work. Generally, any asset that doesn’t have a built-in mechanism for transferring it if the owner dies (for example, an account with a pay-on-death or “POD” beneficiary) is a candidate for inclusion in your revocable trust.
In a future newsletter I will discuss other ways of transferring assets to your beneficiaries.
THE EFFECTS OF TAX PREPAYMENT AND WITHHOLDING
I’m sure I am not the first one to say this, but I haven’t really noticed any extensive discussion of the subject: think about how different the average person’s perspective on income taxes and property taxes would be if, instead of having income taxes withheld from every paycheck and property taxes paid through inclusion with monthly mortgage payments, all taxpayers had to write a check once a year (or even quarterly, as self-employed people do now) for income taxes and once or twice a year (as owners of un-mortgaged properties do now) for property taxes.
It’s an idea that I have thought about before, but it came back to me recently when I learned that in many countries that have a value-added tax, it is actually illegal for providers of goods or services to separate the tax from the price of the goods or services. To me, the reason is obvious: there will be much less popular resistance to the tax, and raising the tax will be much easier, when it’s not readily visible to the taxpayer. I’d like to hear a good reason why the tax shouldn’t be readily visible to the taxpayer.
Nathan B. Hannah is a Shareholder in the Tucson office, and practices in the areas of estate planning and administration, real estate, and commercial transactions. He is also a noted blogger, and you can find more of his articles on his private blog.
Contact Attorney Hannah: firstname.lastname@example.org or 520/ 322-5000