MEMORANDUM

 

To:    Trusts and Estates Files, FB Page, Trust Clients

From:    Andrew T. “Chip” Richardson, III, Esq.

Re:    Funding the Revocable or “Grantor” Trust

Date:    April 17, 2012

 

This memorandum relates only to trusts that are revocable by the grantor;

meaning the grantor can terminate the trust at any time. It does not cover irrevocable

trusts, which, once established, cannot be summarily revoked by the grantor of the trust.

There are differences in the tax treatment of the two types of trust so it is important to

know what type of trust you have.

 

Once your Revocable or “Grantor” Trust has been established, what do you need

to do? Fund it. And, by “fund it,” I mean transfer assets into the Trust or acquire new

property in the name of the Trust, using the specific name set forth in your trust

document. If you never fund the Trust, the Trust will not operate as intended.

 

So, how do you do it? Well, it depends on what you are transferring and when

you are doing it. Certain assets and property require particular actions be taken in order

to effect a transfer. Others only require a simple writing evidencing the conveyance.

Following is a list of common assets that are often part of a personʼs estate, along with

guidance on how to transfer those assets into the name of your revocable Trust. Keep

in mind that additional assistance from professionals (attorneys, insurance agents, stock

brokers, appraisers, etc.) may be required in some instances.

 

Real Estate

In order to put real estate into your Trust, legal title to the property must be

transferred. A Deed must be used to transfer legal title to the real estate, and it must be

recorded to ensure proper notice of the transfer. Accuracy is important in preparing a

deed. Using the proper Grantor and Grantee names and accurately describing the

property are critical. If the real estate is subject to a deed of trust or mortgage

containing a “due on sale” clause, however, conveying the property could trigger that

clause, giving the lender the right to accelerate the full amount of the outstanding

balance of the loan. An attorney should be consulted about this process.

! When acquiring new property, instruct the agent and title attorney to title the

property in the name of your Trust at the time of closing. Be certain the deed executed

by the Grantor (Seller) identifies the Trust as the Grantee.

 

Commercial Paper

If you own commercial paper such as a promissory note, mortgage or some other

document or financial instrument evidencing a debt owed to you, a written Assignment

is used to transfer that instrument to the Trust. The terms of the original financial

instrument should be reviewed to identify any restrictions that could prohibit an

assignment and to determine whether any notices are required. The goal is to avoid

triggering a default under the instrument. The language used in the written assignment

is very important, so be sure to consult a lawyer about drafting the document. If the

financial instrument is secured by real estate (trust deed, mortgage, secured promissory

note), the Assignment should be drafted with the same formalities as a Deed so that the

document may be recorded among the land records where the collateral property is

located.

 

Art, Jewelry, Collectibles

A written Assignment may be used to place these items in the Trust. Separate

assignments should be used for each item of significant value. If you are not certain

about the value, consider hiring a professional appraiser. The Assignment will not need

to be recorded or filed with a government entity (such as an Assignment affecting an

interest in real estate), but should be kept among the records of the Trust, along with

any insurance documents relating to the valuable assets.

 

Life Insurance Policies

Insurance Policies are assets and, therefore, can be subject to probate. To avoid

that, the ownership can be transferred to the Trust, and the beneficiary designations can

also be changed to the Trust, so that any proceeds payable at death do not have to first

be paid to the estate of the deceased. An insurance agent familiar with your policies or

the specific types of policies you have should be consulted first.

 

Bonds

Transferring U.S. savings bonds prior to maturity can have serious tax

implications. Consult tax and legal professionals before transferring Bonds to your

Trust. Recently, the IRS determined that transferring certain U.S. Series I Bonds from

an individual to that individualʼs revocable grantor trust would not trigger a requirement

to report any accrued interest on the individualʼs income tax return. See Treasury Letter

2012-0014, 3/30/2012. Your circumstances are unique and might result in a different

IRS determination. Form PDF 1851 is used to “reissue” U.S. savings bonds in the

name of a revocable trust. Visit www.irs.gov for more information.

 

Limited Liability Company and Limited Partnership Interests

Transferring your interest in an entity could be governed by statute, an operating

agreement, partnership agreement, buy-sell agreement or some combination thereof.

First, be sure to obtain and review any organizational and operational documents

relating to the entity. For LLCs that means Articles of Organization and the Operating

Agreement. For LPs that means the Certificate of Partnership and Partnership

Agreement. There may also be a free-standing “buy-sell” agreement that governs the

rights and obligations of members who wish to transfer their interest in the company.

Usually, transfers to a revocable or grantor trust are not subject to the customary

restrictions, but a review of the pertinent documents must be done to be certain.

After reviewing the applicable documents, contact the remaining members or partners in

the manner prescribed by the governing documents. A basic transfer instrument should

be able to accomplish the actual transfer, but the records of the entity must be updated

to reflect the new membership.

 

Record-keeping

Transfers in and out of the Trust should be documented and kept with the records

for the Trust. At a minimum, a List of Trust Assets should be maintained with specific

identifying information for each asset and the dates of each transfer.

! This memorandum is a guide only and should not be used as a substitute

for legal advice pertaining to your specific situation.

 

A.T.R., III