I regularly get questions from readers regarding the subject matter of this column. I welcome these questions. Oftentimes I am not available to take a call or the question would take more time to answer than I had at that moment. However, I am always looking for column ideas. Many of my columns are the result of these questions from readers.
For example, this week’s column regarding trust funding. I have received many questions regarding trust funding. One of the most common questions that I receive regarding trust funding is “What is trust funding?” Well, trust funding is the naming of your trust as the owner and/or beneficiary of your assets.
If you do not fund your trust during your lifetime, it may have to be funded after your death through the probate court process. For most people, one of the reasons to have a trust is to avoid probate and keep their affairs private. What is the point of having a trust if you do not use it?
A trust is like a new car sitting in your driveway. It sure looks good sitting there, but if you do not fill it with fuel, it’s not going anywhere. Funding your assets is the fuel for your trust. If you do not title your assets in the name of your trust or name your trust as a beneficiary of your assets, your trust will go nowhere until maybe after your death through the probate court process. And that is only if you have a “pour over” will which pours your assets over into your trust. If you do not have a pour over will and your trust is not funded, none of your assets will follow the instructions in your trust.
Funding your trust could be as simple as doing an assignment of your household furnishings and personal belonging or “stuff” into your trust. Or it could be as complicated as real estate. Most real estate with a mortgage requires four steps or “funding transactions” to be properly placed or funded in your trust.
The first step is to request a waiver of the due-on-transfer clause in your mortgage from your mortgage lender. Most all mortgages nowadays have a provision that states if you sell or transfer your real estate, the entire balance of your loan can be called due. Although, there have been some court cases that say a lender cannot call a loan if the transfer is made to a revocable trust of the borrower, I would rather not risk it and request the waiver. Some lenders may require the borrower to pay a fee to obtain the waiver.
Once you have obtained the waiver of the due-on-transfer clause from your lender, you then can transfer your property to your trust, usually by a deed. After you sign the deed, you record the deed at the register of deeds office of the county in which the property is located.
After the deed is recorded, you have to file a property transfer affidavit with the municipal assessing unit responsible for your property. I recommend that a copy of the recorded deed accompany the affidavit. There are two main reasons you file the affidavit.
The first reason to file the affidavit is because it is required by law to be filed whenever there has been a sale or transfer of the property. The second reason is to prevent the “uncapping” of the taxable value of your property to the current state equalized value (“SEV”). This isn’t a big deal if your taxable value is close to your SEV. However, if there is a big difference between the values because you may have owned the property since the mid-nineties when the law changed, failure to file the affidavit can result in substantial tax increases.
The last step in funding real estate into your trust is adding your trust (and your spouse’s trust) as additional insured on your homeowners insurance policy. When you put your home into your trust and you then have a catastrophic loss such as a fire, if you haven’t named the trust(s) as additional insured, your insurance may not cover you. Your home and contents are owned by your trust, but you may be only individually named as insured on your homeowners policy. Your trust(s) are not insured. And because your trust is the owner of your home, your home may not be insured. This is a easy way an insurance company could try to get out of paying a claim.
Some assets, such as bank accounts, stocks, bonds and other investments, must be re-titled into the name of your trust. Some tax-deferred assets, such as IRAs, qualified retirement plans and certain annuities cannot be titled in the name of the trust without current income taxation of the entire account. For these types of assets, we generally name your trust as the primary beneficiary and your spouse then the kids as the contingent beneficiaries. Similarly with group-term life insurance, in which your trust is named as primary beneficiary.
I received a call this week regarding funding of individual life insurance policies and certain annuities. The question was: “My attorney said that all I have to do fund my life insurance and annuities is to name my trust as a beneficiary. Why do you say that I should name my trust as owner of these assets?”
If the only way you planned on accessing these policies or annuities is by dying, then only naming your trust as a beneficiary would be ok. However, if you did not name your trust as owner also, your trustee would not be able to access those funds for you or for your care during your lifetime or change beneficiaries on the assets if circumstances change after your incapacity.
Your agent in a financial power of attorney may be able to access funds in those life insurance policies or annuities and change beneficiaries depending upon how the financial power of attorney was drafted. But have you ever compared the instructions in your financial power of attorney to those in your trust. The financial powers of attorney that I draft are about eighteen pages long compared to eighty to one-hundred pages in a trust. I have seen some financial powers of attorney that are only a single page. A financial power of attorney generally has few instructions. It is mostly a laundry list of powers your agent can exercise. A trust on the other hand, has many instructions and protections in addition to the laundry list of powers.
I subscribe to the philosophy that more instructions are better. I draft for many contingencies because I don’t have a crystal ball to know what is going to happen. I would rather have more instructions than I need and not use some of them instead of needing an instruction that I do not have. If you do not have an instruction for what you want to do, you may not be able to do it. You might be able to get the probate court to allow you to do it. On more than one occasion, I have petitioned the probate court to fill in a missing instruction in a trust. Being unable to act or having to petition the court are not desirable outcomes.
Consequently, I generally recommend that you name your trust as both the owner and primary beneficiary of individual life insurance policies. Your spouse and then the kids are usually the contingent beneficiaries. I generally have the same recommendation for non-qualified (non-IRA) annuities which allow a transfer of ownership to a trust without triggering income taxation.
If you have any questions or would like me to cover something more in depth, please contact me. Your question might be the subject of next week’s column.
By: Matthew M. Wallace, CPA, JD
Published edited April 10, 2011 in The Times Herald newspaper, Port Huron, Michigan as: Trusts need fuel to run properly