Aligning Your Assets
More than 85% of our new clients who already have revocable trusts do not have them fully funded when we first visit with them. Here’s a conversation that I had with a married couple, who I will refer to as Bruce and Robin recently:
“You realize that you’ve never funded your trusts?” I asked.
Bruce and Robin quizzically looked at me, “What do you mean by funded?” Bruce asked.
“Transferred title of your bank and brokerage accounts as well as your real estate into your trusts,” I replied.
“I thought our attorney took care of that,” Robin said.
“No,” Bruce replied, “remember he gave us that sheet that told us what to do.”
Robin agreed, “Oh yes, I remember! Didn’t we ask Alfred to do that for us?”
“Who’s Alfred?” I asked.
“Alfred is our financial planner” Robin informed. “But I suppose he never got around to it.”
“Even if Alfred finished the job with your investment accounts, what about your real estate, business holdings, bank accounts and certificates of deposit?” I asked.
“Good point,” Bruce replied. “Can’t we just transfer our assets into our trust when we die?”
“If your assets are in your individual name at the time of your death they’ll be subject to the probate process through your pour-over will,” I said. “You might as well not have a trust if that’s what’s going to happen. You could have accomplished all your planning in your will. But avoiding probate is a key benefit to having a trust. Also, your trust is there to assist your successor trustee if you should become disabled,” I continued, “and if the assets aren’t in the trust at that time it does you no good.”
That conversation with Bruce and Robin is notis not uncommon. Many attorneys draft revocable trusts only to leave it up to their clients to actually transfer title to the assets and fund the trust. Listing the assets on a trust schedule doesn’t accomplish funding. Instead, the actual title to the account must be transferred.
To transfer title of a bank or brokerage account to a trust, the account title must change to name the trustee of the trust and the date of the trust. An example would look like this: An account in the name of “Bruce Wayne” would instead by retitled to: “Bruce Wayne, Trustee for the Bruce Wayne Trust dated May 29, 2018. Sometimes who the trust benefits is also included in the title using the acronym f/b/o which stands for “for the benefit of.” Consequently, the new title to a bank account in this instance might read “Bruce Wayne, Trustee for the Bruce Wayne Revocable Living Trust dated May 29, 2018 f/b/o Bruce Wayne.”
Retitling bank and brokerage accounts usually involves completing a change of ownership form. Each financial institution has its own form. Sometimes the form requires a notary and other times it requires something known as a medallion signature guarantee, a special signature guarantee for the transfer of securities. It is a guarantee that the signature is genuine and the financial institution issuing it accepts liability for any forgery.
Many clients are confused between the functions of a will and those of a revocable living trust. Whenever you have a revocable trust you typically also have a pour-over will. A pour-over will acts like a safety net, catching any assets in your name at the time of your death and, through the probate process, transferring them for ultimate distribution into your trust.
Because an attribute of your trust is to avoid probate for the assets funded into the trust, having a pour-over will catch assets is not ideal. You want all the assets that would otherwise be subject to probate to be titled into your trust prior to your death so the pour-over will does not have anything to catch and distribute.
Without a pour-over will those assets are subject to your state law’s intestacy statutes for distribution, which likely differ greatly from the disposition called for under the terms of your trust.
In addition to avoiding probate, an often-overlooked benefit to having a revocable living trust is your successor trustee’s ability to conduct business for you in the event of your incapacity. It is a relatively seamless transition from you as your own trustee to your successor trustee.
Durable Power of Attorney Difficulties
You may point to the Durable Power of Attorney (DPOA) document as the alternative, and it is. The problem with a DPOA is that the banks and financial institutions are more suspicious of it in the sense that if a fraudulent DPOA is presented, then the institution may be held liable to you for any losses.
Consequently, when a party presents a DPOA to the financial institution, they frequently ask its legal department to review and approve the document prior to allowing the agent under the DPOA to act. This could take days, or even weeks, if the financial institution accepts the DPOA at all.
Moreover, with DPOAs, the agent often must be physically present at the financial institution itself to create and sign paperwork that enables her to act for you. Each bank also wants an original of your DPOA, of which there is only one. This requires your attorney to record the DPOA in the public records and order expensive certified copies. If your DPOA agent is not local, or does not have the time to visit each institution where you conduct business, then there may be considerable delay accessing those accounts.
Sometimes the financial institution will not accept the DPOA, citing its age (if the governing statute has changed) or its lack of a power the institution deems necessary for the agent to act on your behalf. By definition you may be incompetent and unable to sign a new DPOA.
This presents your agent with a difficult decision—should she sue the bank in an effort to force it to accept her authority or go to court seeking a guardianship over your assets? Either course involves a public court action, which is expensive and time-consuming.
Trusts Own Title to Assets
The trustee of your revocable trust (usually you), on the other hand, own title to your assets, assuming that those assets have been so transferred. When the successor trustee presents a valid trust naming her as the trustee, the bank or financial institution doesn’t have the same concerns that they may have with a DPOA. Therefore, your successor trustee usually has immediate authority to transact business on the trust accounts.
Using trusts serves to avoid a court process both in the event of your disability, as well as upon your death, but the trust will only govern those assets actually funded at the time of your disability or death. Consequently, it is imperative that your trust is completely funded when you need your trust the most.
Trusts Are Not Legal Entities
It is important to note that legally trusts are not entities like a partnership or a corporation. Under trust law, a trustee takes legal title to assets for the benefit of the beneficiaries of a trust. That’s why the change of ownership to a trust is to its trustee. An example is “John Smith, Trustee for the John Smith Trust dated May 1, 2018.” Since the grantor of the revocable trust (in this example, John Smith) is usually also the trustee, it is easy to determine who the trust benefits.
Sometimes, especially in married couple situations, a trust has co-trustees. Here the co-trustees take legal title as follows: John Smith and Jane Smith, Trustees for the John Smith Revocable Living Trust dated May 1, 2018.”
When a married couple has a joint trust, however, the legal title may appear as: John Smith and Jane Smith, Trustees for the John and Jane Smith Joint Revocable Living Trust dated May 1, 2018.”
These examples point out how easy it might be for someone not well versed with funding a revocable trust to err when completing change of ownership documents. A person who is not acting as a trustee, for example, cannot jointly own title to an account with a trustee. When you want to put someone on an account to transact business on the account, it is better to name that person as a co-trustee. With revocable trusts you can always remove a co-trustee.
This is yet another reason why your attorney is integral to the asset alignment process.
Occasionally a client will object to the transfer of his assets into his revocable living trust. Hewill express fear that once the assets are transferred he will somehow lose control over the trust assets. This couldn’t be further from the truth.
In a revocable living trust the client is typically his own trustee. So long as he remains mentally competent, he is the person who governs how the trust operates. He makes investment and distribution decisions. He can move money in and out of the trust easily. He can buy and sell assets inside of his trust.
The trust is nothing more than a different form of ownership. The trust even uses its grantor’s social security number as its tax identification number. For all purposes, the trust is really the client himself. Once this is understood, the client usually feels much better about transferring his assets into his trust.
- Asset Alignment, also known as funding, involves transferring title of your assets into your revocable living trust;
- The proper designation usually includes the name of the trustee, the trust name and date as well as who the trust benefits. The tax identification number for your revocable trust is usually your social security number;
- Persons who are not trustees generally cannot own title to an account with a trustee. To put a “joint owner” for the purposes of transacting business on the account, it is better to name that person as a co-trustee;
- Trusts shine in the event of your disability or death, avoiding court processes. But a guardianship or probate is only avoided to the extent that your trust is fully funded;
- A Durable Power of Attorney document is more difficult to enforce and consequently does not provide a seamless transition, as does a trust;
- To transfer title of assets to a trust, the title is transferred to the named trustee of the trust;
- You remain in control of all of your assets funded into your revocable trust.