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