Before describing the forms and procedures required to put property into a Living Trust, or to take property out of a Living Trust, it’s important to understand exactly what a Living Trust is. So this article will help you understand how a Living Trust works, and why you need to take property in or out of the Living Trust.
What Is A Living Trust?
A Living Trust is a private contract made between the Grantor and Trustee.
This trust is actually made and goes into effect during the lifetime of the trust maker. The opposite of a living trust is a testamentary fund. These types of trusts don’t actually go into play until the death of the trust maker. This type of trust is made using the last will and testament of the trust maker.
Who’s Who in a Living Trust?
Now that you know what is a Living Trust, it’s also important to understand who are the people involved in a Living Trust. There are three parties: the Grantor(s), the Trustee(s) and the Beneficiary (ies), as further described below:
- Grantor: this is essentially the trust maker, and is the person who creates the trust agreement. You may also hear the terms “settlor” or “trustor”, as they are also common words used to describe this person.
- Trustee: This person is responsible for the management of all trust affairs, which includes upkeep of real estate, proper investment of stocks, bonds, and other financial products, as well as making distributions or transferring property out of the trust to beneficiaries and relevant parties. Please note that the Trustee can certainly buy new property on behalf of the trust, but the Trustee has no power to move property into a Living Trust that belongs to someone else (such as the Grantor). This means that the Grantor will personally need to move any existing property into the Trust.
- Beneficiary: This can be a person, charity or organization, and can include any number or combination of them. The Beneficiaries are the people that actually receive the benefits of the trust.
All that can be summarized as follows: the Grantor appoints a Trustee to manage the trust assets, for the benefit of the Beneficiaries.
Types of Trusts
Although you may have read or heard about many different types of trusts, all with different acronyms such as RLT, QPRT, ILIT, etc, there are essentially just two basic types of trust: Revocable Trusts and Irrevocable Trusts. In other words, all trusts can be highly customized for specific situations, but they will always either be revocable or irrevocable.
- Revocable Living Trust is useful for everyone, whether you have $50,000 in total assets or $50M in total assets. Thus, when we talk about Estate Planning and the basic type of trust that is applicable to most folks, we’re talking about the Living Trust, which is a form of the Revocable (Grantor) Trust. The Living Trust will generally involve the same person(s) acting as the Grantor, the Trustee, and the Beneficiary. However, as life events occur, the Trustee may change (e.g., if the initial Trustee becomes incapacitated) or the Beneficiary may change (e.g., when the Grantor dies and the assets are then distributed to the Grantor’s children). It follows then that the main purpose and benefit of making a Living Trust to plan for incapacity, avoid probate and to have a clear plan in place the eventual distribution of property out of the Living Trust.
- Irrevocable Trusts — are not revocable, which means that, after Grantor transfers property to the irrevocable trust, the Grantor has made a completed gift for tax and ownership purposes. This is important and beneficial for many reasons, including asset protection and lowering a potential estate tax burden, however, these trusts require the Grantor to give up ownership and control of assets, as well as follow many formalities similar to running a company. While these Irrevocable Trusts can be very helpful in many situations, they are not appropriate for most situations, as they are more costly and burdensome to setup and maintain, and they should thus only be used in specific instances where advanced Estate Planning is required.
How to Transfer Property into or out of a Living Trust?
Regardless of the type of Trust, transferring property out of it is always the same and requires the approval of the Trustee. Property is transferred out either due to required or voluntary distributions to beneficiaries, or simply because a vendor needs to get paid.
The method of transferring property into a Trust is also essentially the same for any type of Trust. Remember, however, that there are different implications and consequences for transferring property into a Revocable Trust versus an Irrevocable Trust. What’s important is that, even though Revocable and Irrevocable Trusts are created for different purposes, all Trusts can only control and manage those assets that are funded in the Trust, so it’s very important to understand how to put property into the Trust. Since the Living Trust is the most common type of Trust, we will focus on that.
In the situation where you have a Revocable Living Trust, you have taken the first of two steps, which is to create the Trust, but you still need to make sure to take the second and very important step of funding your Trust.
Funding your trust is the process of transferring your property from you personally into the name of the Trust. In the case of a Revocable Living Trust, if you are Grantor, the Trustee and Beneficiary, then you will still control and benefit from the trust assets, and thus nothing will change from a practical perspective. In fact, with a Revocable Living Trust, the IRS will disregard it completely and you continue to use your social security number. But apart from the IRS and other taxing agencies, “beneficial ownership” will change from you personally to the Trust, thereby avoiding probate, among other things.
As mentioned, property will need to be transferred into Trust, in order to be a part of the Trust. A properly drafted Estate Plan will include detailed instructions for property transfers, but as a summary (and not an exhaustive list), you can consider the following:
- Real property: If you already own the real estate, a Trust Transfer Deed is required. This document, which is essentially like a Quit Claim Deed, is a simple transfer from your name to the Trust name. It is essential that a complete Estate Plan include Trust Transfer Deeds for every property that you own, and that the Deeds are signed, notarized and recorded with the County within which the property is situated. Once recorded with the County, the properties will be “funded” in the name of the trust. If you acquire additional properties in the future, please instruct the title company to title the property in the name of the trust at the close of escrow (i.e. the grant deed you receive lists your trust as the grantee, and not you personally)
- Closely held Corporations, LLCs and Partnerships: The shares, units or interests of any company should be transferred to a Revocable Living Trust through the use of an Assignment of Stock (or Units, etc). Once executed, this will transfer your shares of the company to your Trust. We suggest that you provide a copy of the Assignment to the Secretary of the company. If you form (or acquire interest in) any LLCs, corporations or partnerships in the future, you should hold title to your shares, units or partnership interests in the name of your Trust. For example, for an LLC, the “Member” should be your trust; for a corporation, the shareholder should be your Trust; for partnerships, the partner should be your Trust.
- Bank accounts: these should be re-titled in the name of your Trust. This is accomplished by completing a form provided by the bank to change account ownership to the Trust.
- Taxable brokerage accounts: like bank accounts, these should be re-titled in the name of your Trust. This is accomplished by completing a form provided by the brokerage to change account ownership to the Trust.
- Retirement accounts: Here you have some options. In simple situations, where you have minimal assets in an IRA, 401k or other Qualified Retirement Account, we suggest designating a spouse or child as the primary beneficiary and the trust as the contingent. However, in certain situations, where the retirement account has significant assets, we may suggest to consider a whole different type of Trust for funding purposes: the Retirement Trust.
- Life insurance: With life insurance, it’s similar to retirement accounts, in that we suggest designating a spouse or child as the primary beneficiary and the trust as the contingent. However, in certain situations, where the life insurance is significant or if there are Estate Tax concerns, you may wish to consider a whole different type of Trust for funding purposes: the Irrevocable Life Insurance Trust (ILIT).
- Cars: while you can re-title vehicles in the name of a Trust by completing a change of ownership for with your local Department of Motor Vehicles (DMV), this is ultimately not necessary for probate avoidance, since the DMV has an easy way to handle this after you pass.
Transferring property into or out of a Living Trust is not so complicated once you understand the process for each asset type. After reading this article, you are hopefully more acquainted with this process, as well as the basic differences between Revocable and Irrevocable Trusts.