As an Estate Planner I often answer questions about the Mechanics of Trust Funding:
Some important concepts include:
- Only Assets owned by or related to the Trust are controlled by the Trust Terms;
- Common Trust funding Assets include: Real Estate, Bank Accounts, Brokerages, Business Shares, Intellectual Property, and Personal Items;
- Common Assets to Relate to Trust include: Retirement Accounts (Pension, 401(K), IRAs) and Life Insurance.
- The Schedule of Trust Assets is an important Information Sheet (usually at the back of the Trust Instrument);
- Without the Schedule, an asset could become lost due to the Trust Beneficiaries being unaware of its existence;
- A General Note of Assignment is used to transfer miscellaneous house objects and personal effects to the Trust;
- Real Estate is transferred by retitling the Deed into the name of the Trust and preparing Tax Forms.
- Bank Accounts and Traditional Brokerages can be retitled into the name of the Trust;
- Retirement Accounts, including IRAs, and Life Insurance, can rely on Beneficiary Designation. You can relate these to the Trust by naming the Trust as a beneficiary, often as a contingent beneficiary;
- Beneficiary Designations may be inadequate as you cannot list or name a “Beneficiary Class”, i.e. a category of relatives, or your bloodline and heirs- at-law.
If an Asset is not owned or related to the Trust it will be handled outside of the Trust terms. Avoid having an Asset without a succession or inheritance mechanism. If no mechanism in place, it can be owned or related to the Trust, which avoids having to hire a lawyer to assist in its post death collection.
One often overlooked nuance is that you may want to relate tax deductions from the cost of the Tax Administration to taxable income. This means all taxable assets need to flow into the Trust directly (instead of listing an individual’s name in the beneficiary designation, meaning the income goes directly to the individual’s separate tax liability.)
Excess tax deductions from the Trust Administration, at its termination, can be carried over to the individual’s tax return and be claimed over time. This is not as ideal as direct offsets all within the trust.
