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Effective Trust Planning

Updated: Oct 5, 2022

Trusts can be highly beneficial estate planning tools, but it is important to understand the basics of trusts and how to effectively fund a trust for maximum estate planning benefits.

What is a Trust?

A trust is written agreement wherein a separate entity, the trust, holds title of property and assets and manages those assets on behalf of an individual. A trust is created by a settlor (also known as the “trustor” or “grantor”) and the assets of the trust are managed by a trustee for the benefit of the beneficiary. During the lifetime of the settlor of a revocable trust, the settlor retains complete control over the trust and can amend the trust, transfer, or sell assets of the trust, or terminate the trust at any point. Typically, a trust is used as an estate planning tool for purposes of consolidating assets, avoiding probate, estate tax planning, or other related purposes. While there are many types of trusts, for purposes of this article I am referring to revocable living trusts.

How do you “Fund” a Trust?

For a revocable living trust to effectively avoid probate it must be fully funded. “Funding” a trust simply means transferring title of assets to the trust. This means making changes in ownership to change title of your assets from your name as an individual to you as the trustee of your trust.

Typically titling an asset in the name of the trust requires the name of the trustee, name of the trust and date of execution of the trust. For example: Kelly R. O’Brien, Trustee of the O’Brien Revocable Living Trust Dated January 1, 2022, and any amendments thereto.

To actually transfer title to your trust you will need to execute new documents of title. This includes executing new deeds for your real property. This also requires working with your financial advisor, accountant, and attorney to update accounting information or obtain new deeds for real property. If you already have a trust in place, review your assets and accounts to make sure that the trust is actually funded.

Bank & Investment Accounts

For any significant bank or money market accounts, including certificates of deposit, you need to update the title on the account to include the name of the trust and trustee. This will likely require signing new signature cards or ownership documents directly with the bank.

For small accounts or checking accounts you may simply make beneficiary changes rather than re-titling your accounts. By updating the beneficiaries of your checking account, you will ensure that any remaining funds are distributed either directly to your family members or through your trust upon your death. By naming a beneficiary rather than re-titling your checking account, you avoid having to list the name of your trust on all your checks.

For stocks and bonds held in investment account, you will also need to change title of the account to the name of your trust. The process is similar to re-titling bank accounts, but you may have to fill out new account applications so make sure you work with your investment advisor to transfer title of your investments to your trust.

Real Property

Transferring real property to a revocable living trust requires a conveyance of ownership. In Montana this requires the preparation, execution and recording of a deed for each property in the county where that property is located. This also must be filed along with the Montana Department of Revenue Realty Transfer Certificate. If the property has associated water rights you will also need to transfer ownership of the water rights to the trust.

Prior to recording any deed, it is important to review and understand the status of property ownership and any related financing or tax issues. Additionally, if your real property is encumbered by a mortgage or deed of trust you may need to provide additional notices or obtain consent from your lender. Accordingly, it is important to consult with your attorney and tax advisors before conveying title to real property to a trust.

Business Interests

Most business ownership interests, such as ownership in a partnership, limited liability company or corporation, can be assigned to your trust through a written assignment of interest. Typically, the assignment must be approved and signed by the other owners of the business. However, it is important to first determine if there are any restrictions on the transfer of ownership. You may need to contact corporate counsel for the business and/or work with your individual attorney to properly transfer business ownership interests to your trust.

Retirement Accounts & Pension Plans

Retirement accounts are a unique type of investment requiring special planning. Typically, it is not advisable to transfer ownership of a qualified retirement or pension plan to a revocable living trust as they correlate to your age, life expectancy and require minimum distributions. Instead, I generally recommended that you include a spouse, partner, or children as the primary and contingent beneficiaries of these types of plans.

However, appointing beneficiaries for retirement plans may involve complex tax planning and requires individual and specific advice. Therefore, it is essential that you discuss your retirement plan beneficiary designations with your attorney, tax advisor, financial advisor, and plan administrator.

Other Assets

The above descriptions include some of the more common assets that may be transferred to a trust. However, if you have a trust in place it is important that all your assets are either titled in the name of your trust or that you have appointed the specific beneficiary for the asset. Again, work with your advisors to ensure that this is done properly.

Providing Documentation of a Trust

You do not need to provide a bank, financial institution, or title company with a full copy of your trust, but instead provide what is called a “Certificate of Trust.” A Certificate of Trust prevents the disclosure of the private plans for distribution of an estate to third parties. A Certificate of Trust provides documentation and proof that a trust exists, lists the trustees of the trust, and provides documentation of authority and power to transact business on behalf of the trust.

Additionally, you typically do not need to obtain a separate tax identification number for your revocable living trust. If you are the acting trustee of your trust (or for a joint trust if both spouses are living) you will use your own social security number for accounts held by the trust.

Effective Trusts Require Complete Funding

Revocable living trusts can be highly effective estate planning tools. Trusts provide a greater ability to control the distribution of your estate and can provide estate tax planning benefits. Moreover, the use of a revocable living trust can enable your family to avoid a probate proceeding for your estate. However, trusts are only effective so long as you properly transfer title of your assets to your trust. By reviewing ownership of your assets, and following the processes outlined above, you can ensure your trust is properly funded. Work with your legal, financial and tax advisors to make certain that you have followed the necessary steps to fully fund your trust.

If you have questions about estate planning or would like assistance with a will or trust, please call Measure Law to schedule a consultation at 406-752-6373, or email us.

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