Funding and Managing Your Trust - Rex Alan Lowe, Esq.

Law Office of
Rex Alan Lowe

Okay, you've created the appropriate documents (hopefully, with the aid of a knowledgeable professional) but they're just a stack of papers. That may be all you need if you're stuck in a cold mountain cabin with only a few matches and green wood. On the other hand, if your object is to intelligently and effectively plan your estate, you need to make it work somehow.

Below are some details related to this critical phase of making you estate plan actually do something other than help out your attorney financially. Remember, these are guidelines and not intended to settle all (or even most) of the issues. You need to see an experienced estate planning attorney.

Caution: This is dry material, but useful if you have the courage to plow through it.

Since you may fulfill the roles as both Grantor (often called "Trustor") and Trustee, you will want to understand the process of funding assets into and managing your recently created Trust. The physical transfer of assets into the Trust prior to death or disability is essential if probate is to be avoided. In effect, the Grantor of the Trust is transferring property to himself or herself as Trustee rather than leaving the assets registered in his or her name alone to be transferred later to others through a probate court proceeding at death or in the event of disability.

These guidelines are designed to explain the transfer process and assist the individual Trustee in managing the Trust.

Funding is an indispensable first step after you sign the Trust. Exactly which of your assets are to be transferred to the Trust will depend upon the circumstances of each case. The Trustee can only administer those assets that have been transferred to the Trust. The discussion that follows covers methods of funding the Trust with the kinds of assets most commonly held by Grantors.

1. Marketable Securities. The most common method of transferring registered securities is to reregister them in the name of the Trust as follows:

"(Name of Trustee), Trustee of the (Name of Trust) Dated (Month, Day, Year)" [The statement of date is a good idea, but optional.]

You may use your stockbroker to help you to effect the transfer to the Trust or you may handle the transfer yourself simply by writing each transfer agent with the following request:

The request for re-registration should be accompanied by a signed Stock Power or Assignment Separate From Certificate (with signature guaranteed) together with the original stock certificates. Before surrendering your stock certificates, you should record the serial number of each certificate. Some transfer agents will require a copy of the Trust. It is always best to limit disclosure of the Trust to only the portion absolutely needed by the party requesting proof of its terms or existence.

Another alternative is a bank custody account. You may transfer securities to a bank, in which case it will register them in the name of its nominee. The bank will retain them in a segregated custody account for the Trust and will charge a fee for the service. The bank-custodian will also collect the dividends and interest from the securities it holds and credit them to the Trust. Using a bank-custodian will have the added advantage of providing you with detailed records of the Trust's activities. If your Trust nominates a bank as a Successor Trustee, the use of a custody account at that bank would be a logical choice, providing continuity in the event of your inability to continue as Trustee.

Another method of holding Trust securities is to use your stockbroker's "street name" account. This device is generally available only if the Trust is expected to have sufficient trading activity to justify the expense to the broker. The broker will re-register the securities and may charge a fee for this service. Title to this brokerage account should be in the name of the Trustee of your Trust rather than in your name or joint names.

Unregistered or bearer securities, such as coupon bonds, present no particular transfer problems. A short form of assignment by you to the Trustee of your Trust should be prepared to evidence the actual transfer of ownership. This assignment should describe the property with specificity to demonstrate adequately your intent that such property be considered Trust assets. A suggested form of assignment is attached to this memorandum. As an added precaution, when the Trust is created, unregistered assets, such as bearer bonds and coins, may be listed on a Schedule of Assets that is attached to the Trust; the Trustee should maintain records evidencing that these assets are part of the Trust.

2. Real Estate. The Trust defines the limits of the Trustee's power to deal with real estate, and a prudent purchaser, lessee, or lender may demand proof of the Trustee's powers to execute deeds, leases, and related documents. Since the method by which any interest in real estate is transferred to a trust is of great importance, it is imperative to have an attorney handle any real estate transfers for you. Except in the case of land trust interests, the preparation, execution, and recording of a deed in trust for each parcel of real estate will be required.

Beware of the "out-of-state" trustee problem. If your successor Trustee is a corporate Successor Trustee, is may lack the legal power (under certain circumstances) to act on property located outside its state of incorporation. If out-of-state real estate is to be conveyed to your Trust, consult an attorney regarding the method to be used in transferring title to that property.

An interest in real estate that is less than absolute ownership, such as an interest under a land contract, mortgage, or lease, may also be assigned to the Trust. The terms of land contracts, mortgage agreements, leases, or other relevant documents should, of course, be reviewed to ensure that assignment is permitted. Again, consult an attorney as to the proper method of transfer.

3. Bank Accounts. The best approach to transferring bank accounts is simply to register them in the name of the Trust as outlined in paragraph 1. This registration should be on all documents from the bank to indicate complete transfer of legal title to the accounts to the named Trustee. The bank will generally require a copy of the Trust and new signature cards.

4. Life insurance. Proceeds from your life insurance that are payable to a named beneficiary other than your estate ordinarily will not involve probate. You may, therefore, keep your life insurance completely separate from the Trust. In some cases, however, in order to achieve certain tax or distribution objectives, you may want insurance on your life to be owned by and/or made payable to the Trust. In those cases, you must file appropriate change, of ownership and/or beneficiary forms with each insurance company.

If you own a policy insuring the life of someone else, you should transfer ownership of the policy to your Trust as well as name the Trust as beneficiary. This transfer is important because if you predecease the insured and you have not transferred the policy to the Trust, the insurance policy may be subject to probate.

Most insurance companies have their own preferred way of designating beneficiaries and/or successor owners and may require use of their own forms. Consult with each company or your insurance agent to comply with those requirements.

5. U.S. Bonds (Series E, EE, H, and HH). If you have Series E or similar bonds and wish to transfer them to the Trust, you must apply to the Bureau of Public Debt (or a Federal Reserve Bank) on Form PD 1851 for reissuance of the bonds in your name as Trustee. This form may be obtained from your bank. The same ownership designation used for bank accounts and registered securities may be used for these bonds. The original issue date is retained on each new bond.

6. Tangible Personal Property. While personal effects are usually not transferred to a trust, you may assign them by a bill of sale or by an assignment like the one attached to this memorandum. Registered vehicles may be transferred by assigning the title through the Secretary of State.

Your Trust is considered a "grantor trust" for income tax purposes. This means that during your lifetime, as the Grantor, you will report all of the income and deductions of the Trust on your individual income tax returns (Form 1040). Your current Social Security number should be used for the Trust and all its assets. So long as you are serving as the Trustee or as a co-Trustee and all of the trust assets are located in the United States, no separate trust income tax return needs to be filed. When you are no longer a Trustee, the Successor Trustee must apply for a new taxpayer identification number for the Trust using Form SS-4 and begin to file both U.S. and state income tax returns (Form 1041).

Once the Trust has been signed and assets have been transferred to the Trustee, the Trust is fully operative as to those assets only. At this point, there are certain basic steps that the Trustee should take to protect those assets.

Any assets transferred to the Trust that need to be covered by casualty insurance, such as artwork, should be so protected. If insurance is already in place, the insurance policy should be amended by endorsement to add the Trustee as a named insured on the policy. This can often be done at no additional cost.

Stocks and bonds that have been transferred to the Trust should be held in safekeeping, such as in a safe-deposit box. If the box holds only Trust assets and is rented in the name of the Trustee, there should be no problem in identifying bearer bonds or unregistered securities as Trust assets. To facilitate identification of Trust assets and to permit easy access to the safe-deposit box if you die or become disabled, it may be desirable that the safe-deposit box be held in the names of both the Trustee and Successor Trustees.

The Trustee is the legal owner of all the Trust assets. Property held in the name of the Trustee will pass to any Successor Trustee(s) upon the death of the predecessor Trustee, so long as the Trust -- the document that governs the Trust -- allows it to pass this way.

If there is more than one Trustee, they must act together, or at least by a majority, unless the terms of the Trust expressly state that they can manage the Trust in another way.

The Trustee should at all times retain possession of an original, signed Trust. This is the instrument that instructs the Trustee and Successor Trustees how to manage and distribute the assets that are transferred to the Trust. The Grantor of this type of revocable document has much of the same freedom in dealing with his assets after they are transferred to the Trust as he or she enjoyed before the transfer. As Grantor and Trustee of such a Trust, your wishes regarding the management and disposition of the Trust assets, as expressed in the document, will control both during your lifetime and at your death.

Nevertheless, there are certain basic obligations that you have as a Trustee that will always apply. These include the duty to keep separate Trust records, to segregate Trust property from individual property, and to file any required tax returns. The fulfillment of these responsibilities under a trust arrangement will also protect third parties who have future interests in the Trust.

1. Record Keeping. Your Trust should not be funded and then forgotten. As Trustee you have a responsibility to keep accurate records concerning the Trust assets. All transactions involving those assets should be carefully documented.

The "basis" for income tax purposes for assets transferred to the Trust remains the same as your basis before the transfer. When the Trust books are established, the cost basis of all assets transferred to the Trust should be determined and documented. Accurate records will make the Successor Trustee's job much easier.

You need not feel burdened by accounting responsibilities you are unable or unwilling to handle. You can employ an accountant or use the tax and record-keeping services of a bank-custodian or stock brokerage account, as noted earlier.

It may be desirable to list on a Schedule of Assets attached to your Trust everything initially transferred to the Trust, particularly bearer-type assets. You should do this at the time thatyou sign the Declaration.

2. Segregation of Trust Property. The Trustee has an obligation to segregate Trust property. If Trust assets are commingled with the Trustee's own property and not registered in the name of the Trust, then the Trustee or Successor Trustee must identify and provide proof of the Trust's ownership of that property.

A comprehensive estate plan has been created especially for you. A great deal of thought and effort was devoted to the creation and funding of your Trust. If you forget about the Trust, many of the benefits that the Trust would have otherwise provided will be lost or compromised.

If you familiarize yourself with the requirements and guidelines set forth in this memorandum, you should be able to maintain the full effectiveness of the Trust with minimum effort. Questions may arise from time to time that you are unable to answer; in that event, you should not hesitate to call us. Should your personal circumstances change, please remember that your Trust can be readily amended or revoked to conform to your revised estate planning objectives.

Rex Alan Lowe, Attorney at Law
Estate Planning, Probate & Trust Law
630 South El Camino Real, Suite A
San Clemente, California 92672-4200
949.498.3045
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