Many people, perhaps most people, have living trusts as part of their estate plans. Yet, the communications I receive indicate that the workings of living trusts are a mystery to most people.
Living trusts, also known as revocable living trusts, are a key element of most estate plans, because the assets held in a living trust avoid probate. The assets are transferred to the next owners without the delay and cost of probate. A living trust also provides a successor trustee who can manage the assets if you are unable to do so.
Most people know those basics. This month, I answer some of the practical questions I receive the most about the operation and use of living trusts.
Having a living trust drafted and executed isn’t the end of the process. Too many people believe everything is taken care of once they have a living trust.
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 property you own to the living trust.
A frequent mistake is that people have living trusts drafted but then don’t transfer legal title of assets to the trust, known as funding the trust. Only assets actually transferred to the trust avoid probate and can be managed by the successor trustees who take over management of the property after your death or incapacity.
Funding the trust is essential. The trust agreement has no effect if the trust doesn’t have legal ownership of any assets. I’ve found that some estate planning lawyers are fairly diligent about emphasizing this point and assisting clients in funding their trusts.
Many other attorneys, however, are satisfied with giving clients some verbal and written guidance to follow. 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 the 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 have moved or are moving in that direction. No matter your current state law, you don’t want to leave any doubt, and you don’t want your estate executor and successor trustees to have to fight the issue in court.
The mechanics of transferring property to a living trust depend on the type of property and the state in which the trust is located. (A trust usually is considered to be located in the state where the trustee resides.) 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 January 31, 2020. 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 written and recorded 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 jurisdiction where the property is located. Usu-ally, there is no charge or a nominal charge for having the deed issued and recorded, because there isn’t a 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 or the local government office where deeds are recorded. 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. You still have to do this when you are both the current registered owner and the trustee of the trust. 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. One easy action is to have an attachment to the trust agreement that gives general descriptions of the types of property you are transferring to the trust.
Another simple action is to have your estate planner 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 in your own name after the living trust is created, 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 and the custom in your state.
The mechanics for transferring financial accounts often depend on the financial institution. Each institution has discretion to adopt its own procedure. 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 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.
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.
Contact each financial institution with which you do business and ask what its procedure is for transferring accounts from your personal ownership to a revocable living trust.
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 trustees, as far as the IRS is concerned, you still are owner of the property. You’ll be taxed on all income and gains from it.
Therefore, the trust doesn’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 information is all in the instructions to tax Form 1041. All trusts other than revocable living trusts need their own EINs. In addition, the living 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 if the trust converts to an irrevocable trust during your lifetime. A revocable living trust doesn’t help reduce estate taxes. All the assets owned by the trust are treated as owned personally by you for purposes of the federal estate tax. So, if your estate might exceed the taxable amount, you should consider strategies to reduce or pay the federal estate tax.