One of the main purposes of a Revocable Trust is to avoid the probate process when you pass away. Avoiding probate is desirable for many families because it is a time-consuming and expensive process. However, if there is nothing in your Revocable Trust, then it is probably not doing you much good. It is important to understand that if you do not fund your trust, you will not avoid probate and enjoy one of the main benefits of creating a trust. Your estate planning attorney should ensure that an integral part of his or her representation is to guide you through the important, although sometimes tedious, process called “trust funding.”
What is Trust Funding?Funding your trust refers to the process of transferring assets into the trust that are currently held in your name, whether individually or jointly with someone else. In other words, you are retitling your assets in the trust’s name. Examples of assets include real property, beneficiary designations, membership interests in a limited liability company, or stock in a privately held corporation.
- Real Property – In Florida, real estate is referred to as “real property.” This is probably the easiest type of asset to include with your Revocable Trust, because generally all it takes is a quitclaim deed. However, the deed needs to be prepared correctly and recorded in the official records in the county where the property is located. If you are transferring your Florida homestead (i.e., your primary residence) to your Revocable Trust, then it is recommended that both the quitclaim deed and the trust document contain special verbiage reserving your homestead rights under the Florida Constitution; this ensures that the property appraiser does not disrupt or remove your existing homestead exemption and save-our-homes cap benefits when the deed to trust is recorded.
- Tangible Personal Property – Your estate planning attorney should prepare an assignment transferring your tangible personal property to your Revocable Trust. Examples of tangible personal property (“TPP”) include motor vehicles, boats and personal watercraft, household goods, appliances, furniture and furnishings, pictures, silverware, china, glass, books, clothing, and jewelry. Following your passing, your Successor Trustee can utilize the assignment of TPP, along with a copy of the trust document and your death certificate, to transfer your motor vehicles and marine vessels at the DMV without the need for probate court or other court order.
- Business Interests – Transferring business interests to your Revocable Trust can be accomplished with a relatively simple assignment prepared by your estate planning attorney. However, if your stock or membership units have transfer restrictions, then your attorney should assist you by obtaining permission from the company’s leadership to allow the assignment to the Revocable Trust. This is a relatively straightforward process and most companies are willing and able to assist in the transfer process.
- Regular Bank Accounts – When it comes to regular bank accounts, such as checking, savings and money market accounts, you have two options: make your Revocable Trust the owner of the account or the pay-on-death (“POD”) beneficiary of the account. Depending on the internal rules of your financial institution, making the Trust the owner (‘Plan A”) may be simple or complicated. If your bank fits the latter description, then “Plan B” is to make the Trust the POD beneficiary, which is typically just a matter of updating your beneficiary paperwork at the bank.
- Taxable Brokerage Accounts – Non-retirement investment accounts containing stocks, bonds, mutual funds and ETFs are also relatively easy to coordinate with your Revocable Trust. Once you execute your Revocable Trust, your estate planning attorney should send instructions that all taxable brokerage accounts should be re-titled into the name of the Trust. After this happens, the Trust is considered the owner of the account and thus avoids probate when you die (which is the whole point of your Revocable Trust in the first place). Additionally, if you become incapacitated, your “Successor Trustee” named in the trust document will have quick and relatively seamless access to the account assets and can communicate with your financial advisor freely on your behalf. All of the income tax attributes of the investment account will continue to flow through to you on your personal income tax return (IRS Form 1040).
- Tax-Deferred Accounts – Accounts that are “qualified” (by the IRS) or otherwise tax-deferred are treated differently by the IRS. You cannot make your Revocable Trust the owner of these accounts (by law), because they must be owned by an individual. Common examples of tax-deferred accounts include retirement accounts such as IRAs, 401(k) accounts, and 403(b) accounts. There are special steps that must be followed to properly coordinate these types of accounts with a Revocable Trust. If your beneficiaries are minors (under age 18 in Florida), inexperienced or bad with money, or suffer from an addiction issue, then it may be worth the extra effort to coordinate your tax-deferred accounts with your Revocable Trust. However, after the passage of the SECURE Act, for most clients it now makes more sense to name individual beneficiaries on their IRAs and 401(k)s. This is because most non-spouse beneficiaries are now required to withdraw the account assets over a mandatory 10-year period. If your beneficiaries are well-adjusted adults, this is a simpler option versus making the account payable to the Trust as an intermediary.
- Roth IRAs – Similar to Traditional IRAs, Roth IRAs can be made payable to a Revocable Trust, but certain tax requirements must be met. Additionally, you will need to include specific verbiage in the trust document regarding the tax requirements. As with IRAs, the pros and cons of naming the Revocable Trust vs. naming individual beneficiaries should be discussed with your estate planning attorney.
- Life Insurance – You can make your Revocable Trust the beneficiary of your life insurance policy. When you pass away, your insurance company will pay the proceeds to the successor trustee named on the trust. At that point, the distributions instructions in your trust agreement will manage how the payments are made to the Trust beneficiaries.