How to Fund Your Revocable Living Trust In order to gain all of the benefits derived from your Revocable Living Trust, it is “funding ” Funding links your assets to your trust The primary purpose of trustee of the revocable trust Funding a trust also sometimes refers to designating his or her
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ur Revocable Living Trust By Richard M.
DiSalvo This newsletter is the final installment of our three part series on Revocable Living Trusts (“RLT”s).
The first newsletter in this series was “Should I Use a Will or a Revocable Living Trust
? Separating Facts From Fiction,” and the second newsletter in this series was “Do You Need To Fully Fund Your Revocable Living Trust During Your Life
? Separating Facts From Fiction.” This newsletter is for those who answered “yes” to the first two questions: now that you’ve decided to use an RLT in your estate plan and you’ve decided you want to fund it,
at least to some extent,
usually by changing the ownership of those assets to the Trustee of the RLT.
then it will usually be funded after your death,
with a combination of (1) assets that are transferred to the RLT under your Will and (2) assets that are paid directly to the RLT under a beneficiary designation.
then the Will will have to be admitted to probate before the assets can be distributed to the RLT.
Whether you actually need to fund your RLT during your lifetime depends on what you are trying to accomplish by using it.
This topic was covered in the previous installments in our RLT series,
here is a summary of some common situations and the extent to which funding the RLT tends to be needed in each:
then you may not fund the RLT at all during your lifetime unless the incapacity actually occurs
then you should fund the RLT with the non-‐Georgia real estate before you die,
but you may not need to fund it with any of your other assets
The rest of this newsletter will discuss how to actually transfer assets to an RLT.
A) Residence and Other Real Estate (But Not Including Any Real Estate Owned Through a Limited Liability Company or Other Business Entity).
1) You need to execute a deed in order to transfer real estate to an RLT.
In order to transfer ownership of any real estate that you own in Georgia,
you must execute a legal document called a deed.
The deed is then recorded with the appropriate government agency (in Georgia,
would be the Superior Court of the county in which the real estate is located),
the deed must transfer ownership of the real estate to the Trustee of the RLT,
along with a designation stating that the Trustee is receiving the property as Trustee of the RLT.
The language used will generally follow this pattern: (full name of Trustee as stated in the RLT),
as Trustee or successor Trustee(s) of (full name of the RLT as stated in the RLT) U/A dated (date the RLT was signed).
Smith Revocable Trust U/A dated December 1,
then each of them should be named,
using language such as this: (full names of each co-‐Trustee as stated in the RLT),
as Co-‐Trustees or successor Trustee(s) of (full name of the RLT as stated in the RLT) U/A dated (date the RLT was signed).
as Co-‐Trustees or successor Trustee(s) of The John R Smith Revocable Trust U/A Dated December 1,
2014.” If you want to transfer a parcel of real estate to two separate RLTs,
You should also add the words “as tenants in common” at the end of the designation of the second Trustee.
as Trustee or successor Trustee(s) of the John R Smith Revocable Trust U/A Dated December 1,
2014 and Susan M Smith,
as Trustee or successor Trustee(s) of the Susan M Smith Revocable Trust U/A Dated December 1,
as tenants in common.” Tenants in common means that each owner owns an undivided interest in the property.
then the joint owners are deemed to each own an equal share.
Other states may have different rules regarding how a trust must be designated in a deed,
be sure you know how the deed should read.
such as Quit Claim Deeds,
Limited Warranty Deeds,
you should use either a Limited Warranty Deed or a Warranty Deed to make a transfer to your RLT,
This is because using a Quit Claim deed can cause you to lose the benefits of any title insurance policy that may exist with regard to the property.
Using a Limited Warranty Deed or Warranty Deed helps ensure that your title insurance protection is preserved.
when a deed is filed with the Superior Court,
a form called a PT-‐61 form is filed along with it.
The PT-‐61 form updates the property tax records to show the new owner of the property,
and shows the amount of any real estate transfer taxes that are due with the filed deed.
a deed that transfers real estate from a living owner to that owner’s RLT is generally considered a deed of gift,
you do need to pay filing and recording fees to the court.
you may need to file a new application for property tax exemptions,
and you should update your homeowner’s insurance to show both you and the Trustee of the RLT as the owners and insureds.
You should generally have any needed deed prepared and filed by a competent attorney licensed in the state where the real estate is located,
2) You should check certain things before you execute a deed to transfer property to an RLT,
and you should ensure after the transfer that you take any steps needed to keep everything in order.
If you did not get title insurance when you originally acquired the property,
then you should consider having a title search performed and purchasing title insurance.
Title insurance and a title search are not required in order for the transfer to the RLT to be valid.
and having title insurance can make it easier for you to borrow against or sell the property in the future.
b) Check with the lender with regard to any mortgage,
If your real estate is subject to a mortgage,
line of credit,
then you should notify the lender in writing and attempt to get the lender’s consent to or approval of the transfer before you sign any deeds transferring the property to your RLT.
that lets the lender make your mortgage due in full immediately if the property is transferred without the lender’s prior consent,
Federal law generally provides an exemption for the transfer of the borrower’s primary residence to the borrower’s RLT.
this exemption does not apply to real estate that is not used as the borrower’s primary residence.
This means that it is critical to ensure that you have the lender’s approval before you transfer a second home or rental properties to your RLT.
although the primary residence exemption may protect the transfer of your primary residence,
we think it is generally a better practice to notify your lender before you make any kind of transfer of real estate that is subject to debt.
c) Check with the property tax authorities.
you should contact the appropriate property taxing authority’s office to determine (1) whether the transfer will have any effect on the valuation of your property or any other item that will affect the calculation of your property taxes and (2) to find out whether you will still qualify for homestead or other property tax exemptions after the transfer and what you will need to do in order to continue receiving the benefit of those exemptions.
As long as you are the primary beneficiary of your RLT during your lifetime and you will continue using the property as your primary residence,
if you have a farm property or other property that is subject to special valuations or exemptions,
such as a conservation or agricultural use valuation,
even to your RLT.
any kind of transfer can result in the loss of the special valuation or exemption and the need to go through a long and complex application process.
benefits received in previous years can sometimes be subject to recapture if the valuation or exemption is lost before a set date,
d) Ensure that you take whatever steps are needed after the transfer to ensure that you continue to receive the benefits of any property tax exemptions or valuations.
even from the original owner to her own RLT,
can trigger the need for the owner to reapply for the homestead exemption.
These exemptions must usually be filed within a certain period during any given calendar year in order for the exemption to apply for that year’s property taxes.
Georgia required that homestead exemption applications for 2016 be filed between January 1,
2016 and April 1,
you will also need to ensure that you take whatever steps are needed to obtain the benefits of those exemptions or valuations in a timely manner.
e) Update your insurance policies.
Before you transfer real estate to an RLT,
you should consult with your insurance companies to ensure that your homeowner’s insurance and other policies are updated as needed.
then her homeowner’s insurance policy will need to list both the Trustee of her RLT along with the homeowner,
This applies even if the homeowner is also the only Trustee of the RLT.
and liability policies like an umbrella policy may need to be updated as well.
This is also a good time to get a good insurance adviser to help you review all of your coverages and ensure that everything is adequately covered at reasonable rates and by good,
B) Marketable Securities and Cash that are NOT held in tax-‐deferred savings such as IRAs or Qualified Plans.
this means assets that are held in regular bank accounts such as checking and savings accounts,
in CDs that are not IRA CDs,
In order to transfer marketable securities and cash that are held in accounts (not in actual certificate form),
you need to open one or more of the appropriate kind of accounts for the RLT.
The bank or brokerage then needs to be told to transfer the assets from your individual account to the RLT’s new account.
it would generally be better for you to have these stocks added to a regular brokerage account and taken out of certificate form,
because this makes them easier to keep track of and transfer in the future.
An account opened for your RLT should be opened in the name of Trustee(s) of the RLT in the same basic way discussed above with regard to real estate.
you may need to put the same information onto the account paperwork in a different format,
instead of having everything in one line.
instead of having all the information stated as: “John R.
as Trustee or successor Trustee(s) of The John R.
2014,” the bank or brokerage paperwork may ask you to put the name of the RLT on one line (“The John R.
the name of the Trustee on another line (“John R.
the name of the creator of the RLT (also known as a Trustor,
Grantor or Donor) on another line (“John R.
2) Do not have more than one RLT own any given bank or brokerage account.
you should generally have any marketable securities and cash owned in one RLT or the other,
and you should generally avoid having both of the RLTs named as owners on any given bank or brokerage account.
This is due in part to the fact that RLTs cannot own assets as joint tenants,
With a normal joint bank or brokerage account held by individuals in Georgia,
the individuals are deemed to own the account as joint tenants unless a different form is specifically stated in the account paperwork,
and the surviving owner will automatically receive ownership of 100% of the account’s assets at the first owner’s death.
the Trustee (or successor Trustee) is then simply charged with following the appropriate terms of the RLT.
The RLT itself continues,
Having the RLTs specifically own the account as tenants in common does not help,
due to the way ownership of assets in a joint account is determined under Georgia law.
the person who contributed assets to a joint account is the owner of the assets she contributed,
owners own the same respective proportions of any income (interest,
If an account is held by two people (or two RLTs) as tenants in common,
then the deceased owner’s actual share of the account has to be determined in order to figure out what portion of the assets will be controlled by that owner’s Will or RLT.
This often means tracing each owner’s contributions to and withdrawals from the account over time.
it’s generally best to just avoid these issues by not having RLTs own accounts jointly.
3) Do not use payable on death designation or transfer on death registrations on any assets owned by an RLT.
Payable on death (“POD”) designations apply to bank or brokerage accounts other than IRAs or other tax-‐deferred retirement accounts.
or mutual funds.
They are a kind of beneficiary designation and are designed to allow an asset subject to the POD designation or TOD registration to transfer automatically to another person at the original owner’s death.
Because RLTs do not die,
having a POD designation or TOD registration apply to assets owned by the RLT is meaningless,
especially if the POD or TOD beneficiary is not the same as the beneficiaries who would receive the assets under the RLT.
while POD designations and TOD registrations can have their place in an estate plan,
in many cases they can end up actually creating problems and causing the plan not to work as intended,
and they create the need for more changes to be made if the desired asset distribution plan changes.
For these reasons,
we often recommend that our clients avoid using POD designations and TOD registrations even when the clients are not using RLTs as part of their planning.
Interests in companies that are not publicly traded (“closely held” companies) can be held as shares of stock in corporations,
You should always consult a competent attorney before transferring any interest in a closely held business.
While the mechanical method of transferring these interests is often fairly easy,
involving the execution of fairly simple documents,
there are many other factors that must be carefully considered before the transfer is carried out.
Many closely held businesses use agreements that place restrictions on transfers of interests in their companies,
such as a shareholders’ agreement,
or a partnership agreement.
can require the consent of certain other parties before a transfer is made,
and can limit the rights and interests actually given to a transferee or require the consent of certain parties before the transferee receives full ownership rights.
Any such agreement should be reviewed before any transfer of an interest in a company is attempted,
could be that the transfer is simply ineffective and void.
in some cases,
the attempted transfer could trigger some type of penalty or a requirement to pay damages to other owners.
D) Do NOT Try to Transfer Tax-‐Deferred Retirement Savings Accounts Such as IRAs or Qualified Plan Accounts to an RLT During the Owner’s Life.
Make Sure You Use Correct Beneficiary Designations With Regard to These Accounts.
1) If the owner of a tax-‐deferred retirement savings account such as an IRA,
the assets in the account can become subject to income tax immediately.
You should not attempt to transfer the ownership of an IRA or qualified plan account during your lifetime.
the IRS views the change of ownership as if the original owner withdrew all of the assets from the account at the time of the change.
This causes the assets to be subject to income tax and possible penalties,
producing a potentially nasty income tax result and causing the loss of future income tax deferral on those assets.
Please note: changing plan administrators or IRA custodians through a proper transfer is not considered a change of ownership and should not cause income tax problems.
you need to have the beneficiary designation on the account provide for the desired distribution of the assets after your death.
You need to get a change of beneficiary form for each of your tax-‐deferred retirement savings accounts,
and change each beneficiary designation.
The beneficiary designation on a tax-‐ deferred retirement savings account will control what happens to the assets in that account at the death of the account owner.
Beneficiary designations must be carefully coordinated with the overall estate distribution plan.
such as where beneficiaries will receive their assets outright under your RLT,
this will mean that individuals and charities named as beneficiaries under your RLT will also need to be named directly as beneficiaries under your IRA and qualified plan accounts.
In other cases,
such as where your RLT provides for your beneficiaries to receive their assets in trusts that will continue after your death,
the beneficiary designation will likely need to actually designate the trusts that will eventually be created for those beneficiaries as the beneficiaries of the IRA and qualified plan accounts.
Please note: You generally do not want to simply have your RLT itself designated as the beneficiary of tax-‐deferred retirement savings accounts,
If a tax-‐deferred retirement savings account does not have a proper “designated beneficiary” under the applicable IRS rules,
the assets must usually be withdrawn from the account over a very short period of time (within as few as 5 years,
if an individual is properly designated as the beneficiary of an IRA or other tax-‐ deferred retirement savings account,
the individual is normally allowed to use his own life
expectancy as the basis for calculating the minimum required distributions (“MRDs”) that he must take from the account during his lifetime.
This can produce a significant amount of additional income tax deferral and allow a correspondingly greater amount of wealth to be transferred to the beneficiary of the account.
A trust is not normally considered to be a proper designated beneficiary
but a trust can be a proper designated beneficiary if it meets certain IRS rules.
the IRS will look through the trust and pretend that a given individual beneficiary of the trust is actually the “designated beneficiary” of the account for MRD purposes.
Most normal RLTs are not structured in a way that allows the RLT itself to qualify as a proper designated beneficiary on tax-‐deferred retirement savings accounts after the death of the RLT’s creator.
if the RLT itself is named as the beneficiary of a tax-‐deferred retirement savings account,
with proper drafting,
qualify as proper designated beneficiaries and allow their individual beneficiaries to take MRDs based on at least the life expectancy of the trust’s oldest living beneficiary.
the beneficiary designation used on each account should also designate the Trustees of each of the trusts that the RLT will create as separate beneficiaries of shares of the account.
As an example,
if your RLT provides for a Residuary Trust to be created after your death,
and if the Residuary Trust will divide into equal shares for each of four children,
Smith Revocable Trust fbo Child A
Smith Revocable Trust fbo Child B
Please note: the example above will not be suitable for all RLT-‐based plans.
If there may be more than one trust created by your RLT after your death,
and if the different shares are determined by a formula based,
on the availability of your generation-‐skipping transfer (“GST”) tax exemption,
the beneficiary designation used on your tax-‐deferred retirement accounts may also need to include the same
kind of formula to create the shares to be paid to each beneficiary’s separate trust.
You should ensure that you have the help of a qualified professional adviser before you file or change the beneficiary designations on your tax-‐deferred retirement savings accounts.
E) Life Insurance Policies.
You can change the ownership of a life insurance policy on your own life to your RLT,
but in most cases you should only need to change the beneficiary designation on the policy.
you need to obt