Funding your revocable living trust can be overwhelming. It is important that you properly title any assets that you want to transfer into your trust, and there are benefits and disadvantages to transferring such property. If you have questions about a type of property not discussed below, or you want help transferring your property, Andersen Law PC is happy to help.
The following is a selection from Form 1210 – Trust Funding Memorandum from the “Orange Book Forms: Colorado Estate Planning Forms” book published by Continuing Legal Education in Colorado Inc. Please note: This post addresses funding a revocable living trust for an individual. There are slight, but important differences to be aware of if you and your spouse have revocable living trusts or if you have a joint revocable trust.
As part of your estate plan, it is important for you to properly title your assets and keep adequate records. You will continue to maintain control of your assets just as you did before you executed your trust. Handling these assets is not complicated, but you must observe certain procedures in order to assure yourself of the advantages of the trust. Remember that only assets transferred to the trust are controlled by it, and having too many or the wrong kind of assets outside the trust may require that your estate be subjected to probate at your death.
The guidelines set forth in this memorandum reflect the law and our practices as of the date of this memorandum, and are subject to change in the future. If you own assets not identified in this memorandum, or have other questions regarding your trust, including funding, maintenance, and tax reporting, please contact Andersen Law PC.
We can assist you in changing the titles on your existing assets into the name of the trust. If you change the titles yourself, it will be your responsibility to make sure that they are properly titled. This will also be true as you acquire new assets. Different types of assets are handled in different ways, and could have adverse tax and legal consequences if not handled properly. The following suggestions may be helpful to you in titling and managing your assets now and in the future.
1. BASIC TRUST TITLE
The basic title that is recommended for use in holding all assets in the trust is:
“The Your Name Revocable Living Trust dated date.”
Some institutions may require slightly different wording; however, the trust name should always appear in the title. It is usually better not to use the name of the trustee in asset titles since the trustee may change between the time an asset is acquired by the trust and the time it is subsequently sold or transferred.
2. IDENTIFICATION OF TRUSTEES/STATEMENT OF AUTHORITY
When acquiring property in the name of a trust, or selling property that is already titled in the name of a trust, it will usually be necessary to furnish some evidence of the identity of the trustee or trustees that have authority to sign deeds or other legal documents on behalf of the trust.
Usually, an institution such as a bank or brokerage house will be satisfied with receiving copies of the first page and signature pages of the trust agreement, rather than the entire trust document. If a successor trustee is acting, the page that appoints the successor trustee should also be provided.
Colorado has enacted a statute that permits a Statement of Authority to be furnished or recorded as a substitute to show the authority of the trustee or trustees of a trust. This is usually used for real estate (see section 8, “Real Estate”). We can provide you with this single-page statement. Although there still may be instances where the entire trust agreement or an extract of certain provisions of the trust agreement may be requested in connection with a business transaction, the Statement of Authority will suffice in many cases.
3. JOINT TENANCY
Remember that assets owned by you and any other person as joint tenants will pass to the surviving joint tenant automatically at your death and will not become part of your trust. Therefore, you should carefully consider the effect on your trust and your overall estate plan of owning property in joint tenancy.
4. SMALL ESTATES: COLLECTION OF PERSONAL PROPERTY BY AFFIDAVIT
The Colorado Probate Code creates a simplified system of collecting and transferring assets by affidavit when the total value of all probate assets, including real estate, is less than $66,000 (as of 2018, adjusted for inflation; this amount is subject to change). Please note that the affidavit is used to collect and transfer only personal property, including tangible personal property. It cannot be used to collect or transfer real property even if the total value of all probate assets, including real estate, is less than the amount noted above. Therefore, it is possible to keep certain assets in your personal name rather than in the name of the trust and still avoid probate. However, you should closely monitor the value of assets outside the trust to make certain you do not exceed the affidavit limit.
5. INCOME TAX MATTERS
Tax laws are subject to change and the rules discussed below are subject to technical requirements not addressed in this article. You should not rely on the following information without consulting with your tax professional.
After you transfer your assets to your revocable living trust, the trust will be the legal owner of the assets. However, for income tax purposes, the trust is defined as a “grantor trust” and is not treated as a separate taxpayer while you are alive and retain the right to revoke or change the trust.
The current IRS regulations provide a number of filing options for grantor trusts. Among other things, they provide that during your life, as long as you are a trustee of the trust and certain technical requirements are met, the trust is not required to file an income tax return or prepare any kind of summary of tax information. No income need be reported in the name of the trust. Instead, your social security number is used as the trust tax identification number, and the income earned by any assets held by the trust is reported by you on your individual income tax return. If you are in a marriage recognized under federal law, you may continue to file joint income tax returns and report the trust income on your joint return.
Note that any grantor trust may elect to get a tax ID number and file its own abbreviated return, but for purposes of this explanation, we’ll assume that election is not made.
If, during your lifetime, you cease to serve as one of the trustees of the trust, neither a trust tax ID number nor a trust income tax return are required, but the trustee is required to provide you with a statement listing each separate item of income, deduction, and credit that you are required to report on your return.
NOTE: It is possible that bank or brokerage company internal policies may require that the trust obtain a separate tax identification number when you are no longer acting as trustee. If so, the trust will file an abbreviated tax return and pass the tax information on to you through a beneficiary tax letter (similar to an IRS Form 1099). We suggest that your successor trustee contact us and consult with a tax professional if you cease to act as trustee.
At your death, the trust will become irrevocable, and will thereafter be treated as a separate taxpayer for income tax purposes. It will be required to get its own tax ID number and file its own income tax return (unless it elects to be treated as part of your estate for income tax purposes). We recommend that your successor trustee contact us upon your death to discuss these matters. In addition, we strongly recommend that a tax professional be retained by the successor trustee to prepare income tax returns for the trust (and the estate).
If you or your tax professional have any questions about how to report income from assets held by the trust, please contact us.
6. BANK ACCOUNTS
Checking accounts, savings accounts and certificates of deposit in banks, credit unions, and savings and loan associations may be titled in the name of a trust. The ownership of your accounts is determined by the form of ownership reflected on the bank or savings and loan records (not necessarily what is shown on the account statements). If you want to place an account into your trust during your lifetime, you must change the title on the account. However, if you do not wish to have the ownership of the trust reflected on the printed checks, you may request the institution to continue to print your individual name on the checks. This will not affect the ownership of the account.
Another way to title such accounts held in your sole name is to use a “Payable on Death” (POD) designation to the trust, which will put the account into the trust when you die. This form of registration is specifically authorized by the Colorado Probate Code. It would not apply to accounts held in joint tenancy. This means that you would personally continue to be the record owner of the account during your lifetime, but any balance remaining in the account at the time of death would automatically be transferred to the trust. Such an account would read:
[Name of Account Holder] POD The Your Name Revocable Living Trust
dated date, 2019
Using the POD will only transfer the account to the trust upon your death and might result in an unfunded trust, should you become incapacitated.
For bank accounts, you can change the title as soon as the trust is established. For certificates of deposit, you may want to wait until the certificates become due, and then renew them in the name of the trust, in order to avoid penalties for early withdrawal of funds.
Before transferring ownership of credit union accounts, check to see if any associated life insurance benefits will be available to an account titled in the name of a trust (see section on life insurance).
Although revocable living trusts are commonly used in estate planning, some bank employees are unfamiliar with procedures for titling accounts in a trust. If you encounter a problem, ask for the name and phone number of the person who is handling your transfer request. Then call us to assist you. Please note that you do not need a separate tax identification number for your trust. See section 5, “Income Tax Matters.”
7. SAFE DEPOSIT BOXES
Both federal and Colorado law no longer require that safe deposit boxes be “sealed” upon the owner’s death. However, unless the ownership of the box is in the trust or in joint names with a living person, access is limited to looking for a will until a personal representative (executor) has been appointed by the court. If you want to avoid the necessity of opening probate to appoint a personal representative, you should consider having ownership of your safe deposit box transferred to the trust. However, safe deposit boxes owned by a trust should not contain any non-trust property, for example jewelry belonging to a family member, in order to avoid confusion about the ownership of the box contents. It is generally presumed that items found in a safe deposit box belong to the owner of the box.
8. REAL ESTATE
Please note that it is important that the language used in deeds, especially those to trusts, be correct or the title to the property could be jeopardized. We suggest that you allow legal counsel to assist you in these matters.
When purchasing real property, ask the seller to name the trust as the grantee in the deed. If you wish to sell real estate that is owned by a trust, the trustee will execute the deed. When transferring existing real estate from your name to the trust, the form of deed to be used is important. If you own real estate in more than one state, each state’s deed forms should be used, and it may be advisable to consult an attorney to determine each state’s special requirements. The deed should be recorded in the county in which the real property is located. In Colorado, a Statement of Authority should be recorded with each deed to a trust — see section 2, “Identification of Trustees/Statement of Authority.”
You should add your trust to your homeowner’s insurance so that it will be treated as an additional insured.
You should also request a rider to your title insurance policy so that your trust, as owner of the property, will be included in the coverage as an additional named insured. We will be happy to assist you in this matter as it is usually requires communication with the legal department of the title company.
As you can see, there are a number of technical issues relating to real estate titles. As a result, we recommend that you not try to handle transfers of real estate to your trust by yourself, but let us help you make those transfers.
9. REGISTERED STOCKS AND BONDS
Transferring stocks and bonds is an involved process that requires special documentation for each certificate, statement account and dividend reinvestment account. At minimum, the named owner(s) must sign a stock or bond “power” for each and have a financial institution guarantee the signature on each transfer form. It is far easier to have securities deposited to a broker or bank capable of holding title electronically in what is called “book entry form” (“street name”). This is especially true if the objective is to transfer title to a revocable trust. The financial institution should be able to assist you with the deposit of securities into book entry form. Documentation can be supplied to the financial institution to change the title to the account to the name of the trust.
If you own securities that are subject to restrictions on the right to transfer or if you have any difficulty transferring any assets through a financial institution, we are happy to assist you to complete the process.
There are special requirements for transferring treasury securities — including U.S. savings bonds — to a revocable living trust.
Colorado law also permits a stock or bond to be registered in the name of the owner followed by the abbreviation “TOD” and the name of the beneficiary to receive the stock or bond upon the death of the current owner. Securities so titled automatically transfer on death to the designated beneficiary without probate. Although these types of assignments are authorized by Colorado law, you may find some resistance from transfer agents in accepting this form of assignment.
10. UNREGISTERED BONDS
Bearer bonds, such as municipal bonds and unregistered treasury bonds, must be assigned by a separate document, which should be attached to the bond. It can be typed or handwritten and should be worded as follows:
I hereby sell, assign, and convey to The Trustee or Trustees of The Your Name Revocable Living Trust dated date, 2019, all of my right, title, and interest in and to the following;
[Description of Bond]
[Signature]
11. STOCK OPTIONS
Particular care should be taken in transferring stock options to a revocable living trust. The transfer rules and tax implications are extremely complicated. Consult with your tax professional.
12. LIFE INSURANCE
Unless we have given you instructions to the contrary, we recommend that you retain the ownership of life insurance in your individual name. If you do not have an irrevocable life insurance trust (ILIT) and we have not given you other instructions, then we recommend that life insurance proceeds be made payable directly to your trust, by making your trust the beneficiary of the life insurance policy.
The beneficiary designation should be changed to:
The Your Name Revocable Living Trust dated date, 2019
An insurance company often insists on using its own specialized format for making a trust a beneficiary. If that is the case, and if you have any concerns about whether the company or agent’s wording is sufficient, please contact us.
Please note that this will not remove the death benefit from your estate for estate tax purposes. If you would like to discuss planning techniques that can be used to avoid estate taxation of life insurance death benefits, please let us know.
13. RETIREMENT PLANS
If you have a pension or profit sharing plan, an IRA, a 401(k), or other such plan or account, do not transfer ownership to your revocable living trust. Also, do not designate your revocable living trust as beneficiary of the death benefits under these retirement plans or accounts unless we have specifically advised you to do so. The competing tax alternatives need to be carefully considered. The rules are complex, so please discuss your options with us, your tax professional or your financial planner.
14. ANNUITIES
a) Ownership: The owner and the annuitant can be the same person or different people. If you are both the owner and the annuitant, you only need to change the beneficiary of the annuity. If you are the owner but not the annuitant, we suggest that you consider naming your trust as the contingent owner. Contact your agent for assistance in making any changes to your annuity.
b) Beneficiary Designation: Annuities may be either taxable or tax-deferred. It is important to know which type of annuity you have in order to determine how to handle the beneficiary designation.
If the annuity is taxable, we suggest that you consider making the trust the sole beneficiary of the annuity, just like a life insurance policy. However, if the annuity is tax-deferred, do not transfer ownership to your revocable living trust. Also, do not designate your revocable living trust as beneficiary of the death benefits under these retirement plans or accounts unless we have specifically advised you to do so. These competing tax alternatives need to be carefully considered. The rules are complex, so please discuss your options with us, your tax professional, or your financial planner.
15. TANGIBLE PERSONAL PROPERTY
Tangible personal property includes such things as jewelry, artwork, collectibles, appliances, furniture, clothing and housewares.
With certain few exceptions, tangible personal property in the joint possession or control of you and your spouse or partner in a civil union, at the time of death of either you or your spouse or partner in a civil union, is presumed by law to be owned exclusively by the surviving spouse or partner, unless transfer to your trust or alternative ownership is evidenced by a certificate of title, bill of sale or other writing.
Tangible personal property can be transferred to your trust. Registered or titled personal property must be re-registered or re-titled in your trust. Non-titled personal property must be transferred to your trust by bill of sale or assignment. The title or registration should then read:
The Your Name Revocable Living Trust dated date, 2019
This office can assist you with these transfers.
You should first consult with your insurance agent to make certain that the transfer to your trust will not result in unintended consequences, which may cause increased premiums or a change or loss in coverage.
16. MOBILE HOMES
In Colorado, a mobile home is usually treated as personal property. Thus, title is transferred by the title certificate, which is separate from the land on which it is located (see section 15, “Tangible Personal Property”). However, if the mobile home has been permanently attached to the land, it may be treated as part of the real estate. In that case, reference to the mobile home should be made in the deed conveying the land (see section 8, “Real Estate”).
17. PROMISSORY NOTES
Existing promissory notes, whether secured by a deed of trust or other collateral, can be transferred into a trust if permitted by the terms of the note. This is a complex area, and you should allow us to assist you with these matters.
If, in the future, you should loan money to anyone, or if you sell property and the buyer gives you a promissory note, the promissory note should name your trust as the payee. If there is a corresponding deed of trust to secure the note with real property, the deed of trust should also name your trust and should be recorded in the county in which the real property is located. We suggest that you allow us to assist you in these matters (see section 8, “Real Estate”).
18. BUSINESS INTERESTS
Business Interests can include Partnerships, S Corporations, Closely Held (Private) Corporations, Limited Liability Companies, and other such entities.
Before putting a business interest into your trust, you should consult with your attorney or tax professional to be sure that (1) the transfer is allowed by the governing documents of the business, (2) the transfer is allowed under tax laws, (3) you understand all of the tax consequences of the transfer, and (4) there are no special rules that may prevent you from safely transferring your interest to your trust.
The manner in which business interests are transferred to a trust depends on the type of business interest involved and the specific requirements of all of the entity’s governing documents.
You should not transfer business interests without consulting with your legal and tax advisers.
In general, business interests are transferred in the following manner; however, this information may not apply to your particular situation. Partnership and Limited Liability Company interests are transferred by an Assignment of Partnership Interest or Assignment of Member Interest document, respectively. Stock is generally transferred by executing the transfer section on the certificate. Stock without a certificate requires special transfer documents. In all transfers of business interests, resolutions or other legal documents may be required.
If your interest in a business is subject to a buy-sell agreement, it is important to be sure that the transfer complies with the terms of the agreement, and that your trustee is given the proper instructions.
It is important that the transfer to your trust be done properly in order to make certain the transfer complies with federal and state tax laws. We suggest you allow us to assist you with these transfers.
19. PROFESSIONAL CORPORATION STOCK
The laws of most states, including Colorado, require that the stock in a professional corporation be registered in the personal name of the practitioner. Therefore, this type of asset cannot be transferred to the trust during your lifetime. However, probate may be eliminated by executing a stock assignment to your trust in which you state, “This assignment is to take effect upon my death and is made pursuant to the provisions of § 15-15-101 of the Colorado Probate Code.” This qualification in the assignment leaves you as the registered shareholder during lifetime but avoids probate at death. If the stock is subject to a buy-sell agreement with the corporation or with other professional shareholders, you should consider having the buy-sell agreement provide for the purchase price to be made to the trust at death.
20. OIL, GAS AND MINERAL RIGHTS: ROYALTIES AND WORKING INTERESTS
Prior to transferring oil, gas and mineral interests to your trust, you must determine what kind of interests you own. You may own oil, gas, or mineral interests under the surface of a parcel of land owned by another. You may have leased your interests to another and have a royalty interest. You could also have a working interest in the profits of oil, gas or minerals produced from a parcel of land. The manner of transferring these interests to your trust will depend on the type of interests you own. If you own multiple types of interests in the same property, you may need to perform multiple conveyances with regard to the same property to ensure that all interests are transferred to your trust.
In addition, the laws of the state where each oil, gas or mineral interest is located will govern the mechanics of transferring the interest to your trust. In some states, the interest may constitute real property and must be transferred by deed. In other states, the interest may constitute personal property and may be transferred by assignment. Therefore, you should consult with an attorney whose practice encompasses oil, gas and mineral law in the location where the interest is held. Although additional fees may be required, local counsel’s knowledge of the local law and transfer procedures will likely be a significant benefit to you and the future beneficiaries of the trust.
21. ASSETS ACQUIRED IN THE FUTURE
After the initial funding of your trust is complete, your work is not done. You should carefully consider whether your goals in establishing your trust necessitate or favor conveying to your trust each asset you acquire after the initial funding is completed.
If one of your goals is to avoid probate, you should be vigilant in making sure that any asset acquired by you in the future is properly titled in the name of your trust.
The guidelines in this article reflect the law and our practices as of the date of publication and are subject to change in the future.If you and your spouse have revocable living trusts, or you have a joint revocable trust, please remember that some of the information above may not be correct in your situation. And if you own assets not identified in this post, or have other questions regarding your trust, including funding, maintenance and tax reporting, contact Andersen Law PC at beth@andersenlawpc.com or 720-922-3880 for assistance.
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Memo: Form 1210 – Trust Funding Memorandum, “Orange Book Forms: Colorado Estate Planning Forms”; Continuing Legal Education in Colorado, Inc., 2017-2018.
Modified for blog purposes by Julie Nichols, JD/MSW
