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Learning the Nuts and Bolts of Living Trusts for Estate Planning

Last update on: Aug 10 2020

Living Trusts are probably the most used way to avoid probate. They are mainstays of Estate Planning in states with expensive or time-consuming probate procedures. Last month we discussed the different ways of avoiding probate, including the advantages and disadvantages.

This month we discuss the nuts and bolts of operating living trusts. In this discussion I answer some of the practical questions I receive most.

A frequent mistake is that people have living trusts created but then don’t transfer assets to the trust, known as funding the trust. Only assets actually transferred to the trust avoid probate. Also, your successor trustees (who take over management of the property after your death or incapacity) can manage only the assets owned by the trust.


Estate Planning Strategy #1

You always should have more than a living trust. As a back-up strategy you also should have a durable power of attorney (POA) that gives one or more people the ability to manage property you own outside the living trust if you become incapacitated. Include in that POA a clause that explicitly allows the agents to transfer to the living trust property you own.

More importantly, you must fund the trust. For many decades, the law in most states (but not all) was that a formal retitling of property wasn’t required for a revocable living trust when the trust creator, or grantor, and the initial trustee were the same person. All the grantor had to do was declare in the trust agreement that property was being transferred to the trust and attach to the trust agreement a list of property transferred.

New York changed its law a few years back. It now requires a formal, specific transfer of property to the trust for the property to be considered held in the trust. Other states are moving in that direction. In any case, you don’t want there to be any doubt, and you don’t want your successor trustees to have to fight the issue in court.


Estate Planning Strategy #2

The mechanics of transferring property to a living trust depend on the type of property and the state in which the trust is located. Technically, the trust doesn’t own the property. The trustee as trustee (not as an individual) owns the property. The proper legal title in most cases is the trustee’s name, followed by the word trustee, the name of the trust, and the date the trust was created: Max Profits, Trustee, of the Max Profits Living Trust, or his successor(s) in trust, dated July 10, 2015. Some attorneys, or some states, prefer other or additional language, but they all are similar to this.

Real estate usually is transferred only by a deed. To put your home or other real estate in the trust you should have a properly-worded deed recorded in the land records of the locality where the property is located. Usually there is no charge or a nominal charge for having the deed issued and recorded, because there isn’t an actual sale of the property. When there is title insurance or a mortgage on the property, check with the insurer or mortgage servicer before doing the transfer.

When you own real estate in another state, it’s a good idea to consult with an attorney in that state. States have different technical rules regarding living trusts and transfers of real estate. An attorney in your home state might not be familiar with the details of the other state’s laws.

An automobile also has a registered legal title that must be put in the trustee’s name. That usually means signing the title of the vehicle over to the trustee, and then having the trustee register the vehicle with the Department of Motor Vehicles. The state might or might not charge sales taxes and other fees for registering the vehicle. It might also require new license plates, because the owner of the vehicle has changed.

Similar actions might be required for boats and airplanes, depending on the value or weight of the property and the state where it is registered or located.

Other tangible personal property is easier to transfer, including home furnishings, clothing, jewelry, art, and the like. These items don’t have legal title recorded anywhere. The easiest action usually is to have your estate planning advisor draft a bill of sale or deed of gift that describes the general types of property and transfers them from you to the trustee. For property that you acquire after this, there are two options. One option is to include a clause in the original document that says it includes any of the same types of property subsequently acquired. Another option is to issue a new bill of sale or deed of gift each year. The choice often depends on your attorney or the custom in your state.


Estate Planning Strategy #3

Transfers of financial accounts often depend on the financial institution. Each institution has discretion to adopt the policies it wants. Many banks, brokers, and other financial institutions will change the ownership of and title on the account at your request. That means you have the same account number. You don’t have to change any automatic transactions that are in place, order new checks, or take other inconvenient actions.

But some institutions don’t take that approach. They require the existing accounts to be closed and new accounts opened in the new name with new account numbers.

There is no banking regulation requiring you to have the name of the trust on the checks, and most banks don’t care what name and address you have printed on the checks. So, in most cases, it is your preference whether the paper checks associated with a bank account contain your name, the trust’s name, or something else.

The best approach is to contact each financial institution with which you do business and ask what their procedure is for transferring accounts from your personal ownership to a revocable living trust.

Most financial institutions will want a copy of the trust agreement or of the key pages. Some states have a certificate of trust that can be provided instead of the full trust agreement. Some banks also have their own certificates of trust or other documents that they’ll want completed and in their files.


Estate Planning Strategy #4

Income taxes are another key issue with revocable living trusts.

For traditional revocable living trusts that are used to avoid probate, you don’t need a separate employer identification number (EIN).

When you, or you and your spouse, create a revocable trust and also are the trustee, as far as the IRS is concerned you still are owner of the property in the trust. You’ll be taxed on all income and gains from it. Therefore, you don’t need an EIN. Instead, the taxpayer ID number associated with the trust and all property in the trust should be your Social Security number or whatever other taxpayer ID number you use. All the income reported will be linked to your ID number and should be reported on your tax return.

Likewise, the tax aspects of owning a home don’t change. When your residence is transferred to the living trust, as far as the IRS is concerned you’ll still be treated as the owner. You’ll be able to deduct any mortgage interest and real estate taxes paid by the trust related to the home. This is all on page 13 of the instructions to tax Form 1041.

All trusts other than revocable grantor trusts need their own EINs. In addition, your trust will need to obtain its own EIN in certain circumstances. Those circumstances are upon your death, your termination as trustee, the addition of someone else as a trustee, and the trust’s converting to an Irrevocable Trust during your lifetime.



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