Funding the Revocable Living Trust
The following is my current rendition of a letter that I provide to clients after drafting their revocable living trust. I want to make sure to share this information widely, both for my clients and for others who have a trust, but who may not have considered exactly how their property is getting to the trust. Funding your trust is a lifelong process, because not only should you check and recheck and recheck how your accounts are owned and POD, but whenever you acquire new property, it also needs to make it to the trust somehow. For EVERY SINGLE PIECE OF PROPERTY, ask yourself, where is this bank account or retirement account or life insurance policy or house going when I die. If one of your accounts is not POD to the trust, then it probably will end up being owned by your estate, which means a pour over last will and testament will need to be entered into probate to transfer that asset to your trust. This is not the end of the world, but it costs more and takes longer than checking your beneficiaries now. The below advice is general in nature and does not create an attorney-client relationship. Specific advice can be provided only after hiring me as your attorney. But I hope this is helpful.
Your revocable living trust is helpful only with regard to that property which is transferred to your trust during your life or made payable on death or transferrable on death to the trust (POD or TOD to the trust). It is the client's responsibility to make sure their financial accounts pass to the trust on death. The advice in this letter is general and does not supersede specific legal advice. I usually do not advise the trust owning property during your life. This is because individual ownership of property can be easier with regard to certain transactions (e.g., selling a house as an individual), and for potential Medicaid and bankruptcy reasons. For these reasons, I usually recommend making the trust the TOD or POD beneficiary.
1. Kansas Real Estate. I usually will have already drafted transfer on death deeds or quit claim deeds for your residence and any other Kansas real estate. If you move or acquire other property, contact me so I can provide a TOD deed for the new real estate. Real estate in other states must be addressed by an attorney licensed in those states.
2. Bank Accounts. For a single person (unmarried, divorced, or widowed), make the trust the POD beneficiary on your bank account. For joint owners of an account, the trust should be the POD beneficiary. In some cases, you may wish to make an individual (i.e. spouse) the first POD beneficiary, and specify the trust as the alternate beneficiary.
3. Other Financial/Retirement/Insurance Accounts. All other financial accounts should have their ownership and beneficiary designations reviewed and updated. This applies to retirement accounts that are Roth (not deferred tax), capital accounts with a tax basis, and also the beneficiary designations on life insurance policies (just the beneficiary, not the owner of such accounts). Generally, the trust should be made the POD beneficiary on all of these accounts.
4. 401(k), IRA, and other Deferred Taxation Accounts. These accounts must generally be owned by an individual during life. If you are single, you usually should make the trust the pay on death beneficiary of these accounts. If you are married, you usually should make your spouse the first beneficiary of these accounts and the trust the alternate beneficiary. Note that your beneficiaries, whether individuals individual or a trust, will be required to pay income tax on these accounts after your death. There are complicated and ever changing rules regarding the taxation and timeline for distributions from a deferred tax account. My first priority as your estate planning attorney is to make sure your property passes to your intended beneficiaries, and the amount and timeline of taxation of the deferred tax accounts is secondary to making sure the correct beneficiaries inherit the property. If you are particularly concerned about the taxation of IRAs or other deferred tax accounts, you may wish to make individuals the POD beneficiaries or consult with a CPA about the tax treatment of IRA's passing to or through the trust.
5. Tangible Personal Property and Vehicles. By signing your trust instrument, we will have usually included a clause assigning your tangible personal property (i.e., your household goods) to the trust. Cars and other vehicles can be made TOD to the trust only by visiting the DMV.