HOW DO I TRANSFER PROPERTY TO MY LIVING TRUST?
It is first important to understand that a trust itself is not a legal entity that can hold assets like a corporation. Instead, a trust is a contractual agreement between a grantor and a trustee. When we say that property is transferred to a trust, we really mean that property is transferred to the trustee of the trust, to be held in trust according to the agreement between the grantor and the trustee.
REAL PROPERTYIf you wish to transfer your primary residence into your trust, certain deed documents must be prepared to achieve that transfer. As with personal property, the transfer will be to the trustees of the trust (and any successor trustees) rather than to the trust itself. Once prepared the deed(s) should be recorded at the County Recorder's Office in the county where the real property is located.
If you own other real property in addition to your primary residence, that property may also be transferred to your trust in the same way. However, if there is a mortgage on that property, you may need to seek consent from the lenders before making the transfer. NOTE: Since you are changing legal title to real property when you transfer it to a trust, it is important to notify your homeowners insurance and title companies of the transfers so that the trustee can be added as an additional insured.
BANK ACCOUNTSKnowing that title to an asset must be transferred to the trustee of the trust, rather than to the trust itself, you will simply provide a copy of your Certification of Trust to your bank representative and indicate which accounts you wish to transfer to your living trust. WARNING: DO NOT GIVE ANYONE YOUR ORIGINAL DOCUMENTS. A BANK MAY WANT A COPY OF YOUR TRUST DOCUMENTS, BUT THE ORIGINALS SHOULD ALWAYS REMAIN IN YOUR POSSESSION. You may be asked to sign a new signature card and account agreement as trustee. Banks handle such requests frequently, so the transfer should be fairly straight forward.
If you have a bank account that you use for direct deposits ask the bank to keep the account number the same but just change the title to the account as trustee of the trust.
If you have named beneficiaries on any of the bank accounts, you will typically want to remove the beneficiary designation when transferring the accounts to your living trust. As an alternative, you could leave the accounts outside of the trust but change the beneficiary designation to the trustee of the trust so that the funds in the account are payable on death (POD) to the trustee (and any successor trustees of the trust). Both methods avoid probate or a court taking control of the funds if your beneficiary is a minor or incapacitated when you die, or if the beneficiary dies before you. Your trust agreement should include provisions for handling assets for a minor, disabled or predeceased beneficiary to accommodate these potential situations.
SOLE PROPRIETORSHIPSSelf-employed individuals operating as sole proprietors are treated differently than most business interests since the individual is the business. If you wish to have the trustee operate the business, then business licenses and DBAs ("doing business as") and fictitious name certificates would normally be filed with the appropriate authorities. Normally however, a contingent assignment of business assets to the trust coupled with a power of attorney affects a transfer of the business property to your trust when the owner can no longer run the business.
The business bank account, however, should typically be made a P.O.D. account to the trustee. This step and an assignment of property to the trustee at death will permit the trustee to take over and dispose of the business of the owner and avoid probate.
CLOSELY HELD CORPORATIONSBe sure that transferring your interests to a living trust will not trigger a buy-sell agreement with other owners. (If it does, you may wish to revise the agreement.) If you put your small business stock in your trust, the appropriate corporate records will then need to be prepared to permit transfer of the title to the stock to the trust. This may include amending the corporation's bylaws and other corporate documents. Share certificates will also need to be re- registered in the name of your trustee.
BUY-SELL OR SHAREHOLDER AGREEMENTSAs long as there is nothing in the agreement that prohibits it, a buy-sell or shareholder agreement can be assigned to your trust (by using an assignment).
SUBCHAPTER S CORPORATIONSWith a subchapter S corporation, both the earnings and any losses of the corporation are passed through to the owner(s) personally. Earnings are taxed only once at the personal level and any losses can be deducted from ordinary income.
Transferring subchapter S corporation stock to your living trust does not typically cause any problems while you are living. After you die, however, the stock can stay in your living trust for a limited period of time, usually up to two years. After that, it may lose its "S" status and become a "C" corporation. Two years is usually plenty of time to distribute the stock to the beneficiaries so the "S" status can be retained. If you do not want your beneficiaries to receive the stock outright, the tax code also allows it to be transferred to other trusts that meet its qualifications to retain the "S" status. I recommend you discuss this with your accountant.
PARTNERSHIPS/LIMITED LIABILITY COMPANIES (LLC)If you have an interest in a partnership or limited liability company, your interest can be assigned to your trust. This probably will not disturb the existing agreement or affect your partners in any way, but you should check the partnership agreement or LLC articles of organization, operating agreement and any other agreements which may be in effect to be certain.
The general partner or managing member of the LLC may already have a form to assign your interest to your trust. The assignment should identify your interest that is being transferred, how the interest should be titled, and that the trustee accepts any liabilities as well as benefits. Notice of the assignment should be sent to the general partner or managing member with instructions to make the transfer in the records of the business. If the partnership or operating agreement requires you to send the notice of the assignment to the other partners or members, then this step should not be overlooked or a court may find that the transfer was not completed properly. Other documents may also need to be prepared to complete the transfer depending on the company's controlling documents.
The general partner or managing member of the LLC may already have a form to assign your interest to your trust. The assignment should identify your interest that is being transferred, how the interest should be titled, and that the trustee accepts any liabilities as well as benefits.
CHECKING ACCOUNTS AND AUTOMOBILESTwo assets which I generally recommend not be held in the name of the trustee are a regular joint "household" checking account and automobiles. This recommendation does not apply in those situations where very large amounts of funds are held in a checking account. It also does not apply where your vehicle is an antique nor has an unusually high value. These types of assets generally should be transferred into the trust. NOTE: If you do title a vehicle in the name of your trust, don't forget to notify your insurance company so they can change your policy to reflect the change of ownership and list the trustee as an additional insured. Your insurer may request a copy of the new registration and a letter of instruction from you.
LIFE INSURANCE POLICIESLife insurance policies are typically held outside of a trust and are either payable on death to specific beneficiaries, or may be payable to the trustee of your trust on your death if you wish to have the proceeds distributed according to the trust agreement. The latter option is generally recommended if any of the beneficiaries may be minors or incapacitated at your death.
RETIREMENT AND PENSION PLANSWhile it is usually recommended that all titles to assets be transferred to your living trust, retirement accounts and pension plans are an exception to this rule of thumb. Qualified retirement and pension plans such as IRA's, 401(k)'s, profit sharing plans, Keogh plans, and tax-sheltered annuities are all tax deferred plans. Since taxes have not been paid on the funds in these accounts, it is recommended that beneficiaries be added to the account.
If your spouse is the primary beneficiary I recommend that you add contingent beneficiaries to the account. This will prevent a probate should the spouse be first to die. If a trust is named beneficiary there may be severe tax penalties if they are transferred to a trust or paid out before reaching retirement age. Therefore, if you hold any of these accounts, it is recommended that you consult with your tax adviser before making a decision about whether to add your living trust as a primary or contingent beneficiary.