THE BIGGEST ESTATE PLANNING MISTAKE: DON’T FORGET TO FUND YOUR TRUST
One of the most common mistakes in Estate Planning is: A person will go to a lawyer (or some non-lawyer salesperson will come to their door) and they are talked into “purchasing a Trust” to help protect the person’s assets and to avoid probate and conservatorship, which both require that the court gets involved in managing your finances when you pass away or become incapacitated. So the client pays for a trust and receives a whole bunch of trust documents in a binder, and not understanding all the legalese written in there, puts the binder and documents away in the file cabinet or on the shelf without doing anything further.
The mistake is that creating the trust document is only the first step. In order for the trust to work, you must follow through with “Funding the Trust.” When you create a trust it’s like making a basket to hold your assets. Anything that you subsequently put into the basket can be managed and controlled by you as the trustee or by your successor trustees if something happens to you. However, if you don’t change the title (or legal ownership) of your assets from your name into the name of the trustee of the trust, then the trust is not yet the owner—you are still—and if anything happens to you, the successor trustees will not be able to manage those assets through the trust as you intended.
Here is a quick summary of how you would put different types of assets into your trust, and which assets do not need to go into your trust. First, the way that you title assets generally is: (1) the name of the trustee, (2) followed by a designation that they are a trustee, and (3) the name of the trust; (4) the date of the trust; and finally, (5) if it has been amended. For example, John Doe might transfer assets by changing the legal title to “John Doe, Trustee of the John Doe Revocable Living Trust, dated January 15, 2012, as amended.”
When your bank, credit union, stock broker or insurance agent asks for a copy of the Trust Agreement, rather than giving them the full Trust Agreement, you should give them a copy of the Short Form Trust. However, some financial institutions may require a copy of the actual full Trust Agreement. The following instructions will help you transfer different kinds of assets to your Trust.
- STOCKS AND BONDS.
(a) Closely held or private corporation stock: Use the back side of the stock certificate to make the transfer, and have the officers of the corporation record the transfer in the Stock Transfer Ledger, and issue you a new stock certificate.
(b) Brokerage Account: Contact broker to change name of account to your Trustee.
(c) U.S. Savings Bonds: Any bank where savings bonds are purchased can provide a transfer request form (Form 1851) which must be filled out and submitted to the U.S. Treasury together with the original bond(s) – certified mail, return receipt requested, is recommended; each bond will be reissued in the trust name with its original issue date.
- SAVINGS AND CHECKING ACCOUNTS.
(a) Regular Passbook Savings and Time Certificates (CD).
Contact bank or credit union and have them change the name on the account to your Trustee. Some financial institutions will require that an existing account be closed and a new one opened for the Trust. If so, and if funds must be kept in the account until the end of the calendar quarter to earn interest, close the old passbook after the end of the quarter or CD after it matures if you don’t want to lose interest.
(b) Checking.
Contact bank or credit union and have them change the name on the account to your Trustee. Some financial institutions will require that an existing account be closed and a new one opened. Others will simply change the name on the account and keep the same account number.
- AUTOMOBILES.
In Hawaii, an automobile does not have to be transferred to the Trust. As long as there is no probate of your estate, title to an automobile can be transferred after death by having the successor sign an affidavit which the Department of Motor Vehicles provides.
- LIFE INSURANCE.
If you do not give ownership of your life insurance policies to the beneficiary or to an Irrevocable Trust, then you should own them personally. Contact the insurance company to request a change of beneficiary form for each policy. The beneficiary should be “THE ACTING TRUSTEE OF THE JOHN DOE REVOCABLE LIVING TRUST dated January 15, 2012, as amended” Send change forms to the insurance companies and attach to policies the endorsements you receive from the insurance companies.
- REAL PROPERTY.
(a) Conveyance.
(1) Prepare Conveyance Document (Deed, Assignment of Lease, etc.) and Exemption from Conveyance Tax Certificate (Form P-64B);
(2) Obtain Consent of Mortgagee (if required);
(3) Obtain Consent of Lessor (if required); and
(4) Record at Bureau of Conveyances.
(5) Notify homeowners and hazard insurance carriers of the transfer into the Trust. Ask insurance carriers to name the Trust as an additional insured.
- IRA, TAX SHELTERED ANNUITY, OR QUALIFIED PLAN (Pension, Profit Sharing, 401(k), Keogh or ESOP).
You should designate your beneficiaries under the guidance of someone knowledgeable in IRA and retirement account distribution rules. You can setup a special kind of Trust to receive and protect your IRA funds for your beneficiaries. Otherwise, you would generally NOT make your revocable living trust the beneficiary of your IRA funds, but rather you would name individuals if you don’t have an IRA Beneficiary Trust.
OKURA & ASSOCIATES, 2016
Honolulu Office (808) 593-8885
Hilo Office (808) 935-3344
Ethan R. Okura received his Doctor of Jurisprudence Degree from Columbia University in 2002. He specializes in Estate Planning to protect assets from nursing home costs, probate, estate taxes, and creditors.
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This column is for general information only. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate planning specialist.