ESTATE PLANNING LAW REPORT
“Funding” A Trust, and Other Ways To Leave Things To People Without Using A Will

I have written at various times in the past about re-titling your assets after you have established a trust.  I have also emphasized the importance of this process. Nevertheless, I still get more questions about this process than just about any other estate planning topic. So, at the risk of redundancy, I decided that it’s time for a review of this important subject.

When you establish a trust, the purpose is usually to facilitate the management, and eventual distribution, of assets. To make that work, you must make your trust the owner of your assets (with certain exceptions that I will discuss later) by transferring ownership of your assets to 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, for example, there is a document that spells out the terms of a trust, but the trust isn’t actually established until some future event occurs.

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 your trust the owner is usually simply a matter of 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 who own shares in a publicly traded company actually hold the share certificate anymore. It’s far more common for the shares to be held in a brokerage account. Occasionally, however, there will be a need to actually change the ownership of shares represented by the stock certificate. It usually involves sending the certificate to the company’s transfer agent with an instruction signed by the owner of the shares, telling the transfer agent to change the ownership of the shares. 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 shares of stock, it’s rare anymore to have bonds held outside of a brokerage account.

The point is that when you establish a trust for the purpose of holding your assets and ultimately distributing those 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, discussed further below) is a candidate for inclusion in your revocable trust.

Some assets are usually not included in a trust, however. The primary example of an asset that generally should not be placed in your trust is your conventional individual retirement account (IRA). Because a conventional IRA contains un-taxed income that will be taxed when withdrawn from the account, the IRA should usually have a person or an organization (such as a charity) named as the beneficiary. This means that it will go directly to the named beneficiary, without need of your trust (or will) to effectuate the transfer. The tax considerations will generally be much simpler if you pass your IRA directly to your beneficiary rather than doing it through your trust or will.

Other assets can have beneficiaries designated for them so that there is no need to include them in a trust. One simple example of this is a beneficiary designation for your vehicle titles. In Arizona, you can complete a form provided by the state’s vehicle licensing agency that allows you to designate one or more individuals to receive title to your vehicle if you own that vehicle at your death.

Naming a beneficiary for your vehicle is similar to another set of Arizona laws that allow you to name beneficiaries on bank accounts and other types of financial accounts. This is the “POD” or pay-on-death beneficiary designation that I mentioned earlier. The difference between naming a beneficiary for your vehicle and one for your financial accounts is that beneficiary designations for financial accounts must be made on the records of the bank or financial institution. Like the beneficiary designation for your vehicle, the beneficiary designations on accounts can be changed any time while you are still living.

You can also do the same thing with your house or other real estate by signing and recording a beneficiary deed. I have covered that topic several times previously, going all the way back to when the Arizona legislature first authorized the use of the beneficiary deed in 2001.

All of these methods of naming beneficiaries can be useful because they allow the assets that have the beneficiary designations to be transferred directly to the beneficiaries without the need for either transferring the assets to a trust or a court proceeding (probate) to administer your estate.

There are some situations where a beneficiary designation might turn out to be less efficient than an estate administration, however. A beneficiary designation isn’t practical if you have too many individuals named as beneficiaries. If you want to make more than one or two individuals the beneficiaries of a bank or brokerage account, for example, it might be better to handle that in your will. For tangible assets such as a vehicle or a house, naming multiple beneficiaries will result in that asset having multiple co-owners, an often impractical situation. If that’s what you have in mind, I suggest that you consult your estate planning attorney about possible alternatives.

This communication is designed to bring legal developments of interest to the attention of our clients and others. It should not be relied upon as a substitute for specific legal advice in a particular matter. For further information on any of the subjects discussed, or for legal advice in connection with any particular matter, please contact us.