INSTRUCTIONS: Once You Have A Living Trust, Then What?

Should I put “this” or “that” in my trust?
This is a common question. “Should I put “this” or “that” in my trust?” In response, think of this alternate question: how will my friends/family know who is supposed to inherit the “this” or “that”? There are 3 general ways to arrange who is entitled to your assets after you are gone:

1. If the asset is in a trust, the trust “distribution” will determine who inherits the asset, and when they inherit it.
2. If the asset already has a “transition plan” associated with it (e.g., the asset is already co-owned with another person; or it has a beneficiary designation), then the institution abides by that transition plan, regardless of whether you have a trust or a last will and testament (“will”).
3. If the asset belongs in neither of the above categories, it is like a “financial orphan”, and will pass pursuant to the owner’s will, or by the applicable state law if there is now will.

So, should you put “this” or “that” in your trust? It is up to you. The asset need not be put in your trust, but there should be some mechanism in place to distribute the asset upon your death; however, there are a number of potential pitfalls involved in mechanisms 2 and 3 above. In brief:

Co-owned Assets:

• Co-owned assets can usually be spent or withdrawn by the co-owner (even though it’s really your money), even while you are alive.
• Co-owned assets are exposed to the liabilities of the named co-owner (e.g., their bankruptcy, their law suits, their divorces, their gambling addictions, their IRS woes, etc.).
• Co-owned assets belong to the named co-owner outright upon your death (even if you intended that the co-owner use the money to pay funeral expenses or to share with others). What the co-owner does with it after you are gone is entirely up to them, because it is legally their asset.
• Adding co-owners to your California real property could trigger property tax reassessments; and for any asset, adding a co-owner can trigger gift tax and capital gains tax issues (e.g., the loss to your beneficiaries of a valuable “step-up in basis” when you die). Ask your tax professional for more details.

Beneficiary Designations:

• By leaving your name on the bank accounts, when you die, your beneficiaries are entitled to their inheritance atage 18 (this could be cause for concern for 18 year olds inheriting significant amounts of your hard-earned money).
• By leaving your name on the bank accounts, when you die, your beneficiaries are not entitled to their inheritance until age 18 (this could be unfortunate if they needed the money for legitimate purposes before turning 18).
• Compare to a trust: trusts are able to restrict the release of inheritances until ages higher than 18 (slowing down potential wastage), while permitting the trustee to access money for legitimate reasons (e.g., college or medical matters) prior to that higher age you selected. If your trust has such an age provision, it may be preferable to put accounts in the trust directly, or name the trust as the beneficiary of an account (for IRAs and tax deferred retirement plans, see above). The money would then be managed by your trustee until the intended beneficiary reaches the age you determined in advance. We recommend speaking to a financial advisor prior to adjusting beneficiaries, so you can be aware of the tax implications and the beneficiary’s withdrawal options when a trust is being named the beneficiary.
• By leaving your name on the bank accounts, if you become incapacitated, someone will need a power of attorney to access your money to help pay your bills. We have found that banks work more readily with a Successor Trustee of an account in the name of the trust than they will with a power of attorney of an account that is in your name alone.

Wills:

• A will can direct your assets to your chosen beneficiaries, but wills do not avoid probate the way trusts do. If the “orphan assets” described above (see the tip about “Should I put ‘this’ or ‘that’ in my trust?”) are cumulatively worth more than $166,250.00, all the orphan assets are subject to probate.

If after mulling over the above explanations you still have a question about your particular scenario, please contact our office.

Let’s start with a quick primer on the difference between separate property and community property (this aspect of property is considered the “character” of the property). Generally speaking:

• Any property earned during a marriage belongs to “the community” (i.e., is “community property”), not to the individual who earned it (unless the married couple made other arrangements with a pre-nuptial or post-nuptial agreement).
• Any property owned by an individual prior to marriage is, generally, their separate property (unless the owner has commingled that property with the spouse’s or community’s property, or deliberately changed it to community property or to the separate property of the spouse).
• Any property inherited by a married person is the separate property of the married person, unless the inheriting spouse commingled that property with the other spouse’s separate property or with the community’s property, or deliberately changed it to that other type of property).

Before adding separate property to a joint trust, it is important to read the trust to see what it says about the character of property transferred to the trust. Did the spouses agree (by signing the trust document) that property added to the trust would retain its original separate or community character, or is there a different default presumption about the property? Generally, for the couple’s trusts prepared by Hart, Mieras & Morris, Inc., the presumption is that the property transferred to a joint trust will be deeemed community property unless it is otherwise identified as the separate property of one of the spouses. So, please be aware of your own trust’s treatment of the character or property added to the trust, and proceed accordingly.

Also note, generally a joint trust has 2 trustees who facilitate the management of the assets in the trust. If separate property should be added to such a trust, even if the character remains identified as separate for purposes of ownership, practically, the cooperation of both trustees is likely to be required for certain transactions. If the cooperation of the other trustee would be unduly burdensome, you may want to consider a separate trust for such separately owned property.

The Trustor may add or remove assets from a trust at will. If a Trustor needs assistance with funding a trust, the Trustor may retain the assistance of others (e.g., the bank, a broker, an attorney). However, it is not essential to report to an attorney after funding or removing assets from a trust. The important thing is to keep track for your own records. See the tip about “Keeping Track of What’s in the Trust.”

Trustors do well to keep track of what they have transferred to their trust. This can be accomplished by updating the “Exhibit A”, usually found a few pages after your signature page of the trust, if Hart, Mieras & Morris, Inc. prepared your trust. Other firms may identify this document as “Schedule A” or “Schedule of Assets”. Whatever the name, the purpose of this document is to summarize the assets that you have titled in the name of the trust. For more information about how to title various assets in the name of a trust, please refer to the prior sections about specific assets and how to transfer them to a trust.

Step 1: retitle the asset in the name of the trust (e.g., with the bank, the broker, the DMV, the county recorder – for real property).

Step 2: keep track on Exhibit A. Step 1 should happen first!

Typically, this Exhibit A does not need to be approved by an attorney or professional, nor does it need to be notarized. It simply serves as your “treasure map” for what’s in the trust, and will be very useful to the Successor Trustee whom you have appointed to finalize your affairs. You are welcome to prepare the list on a spread sheet or Word document, and swap your document for the initial copy provided with your trust. Update Exhibit A as often as there are changes to the assets in your trust (e.g., to delete accounts that have been closed or properties that have been sold; to add new accounts or purchases of assets that are titled in the name of the trust).

For a comprehensive list of ALL of your assets, both those in the trust and those not in the trust, you may want to add another page summarizing your non-trust assets. In any event, your Successor Trustees and beneficiaries will appreciate your thoughtfulness for making their responsibilities a little easier by providing current information about your trust and non-trust property.

Sharing your documents with others is a personal decision. There is no “right” or “wrong” answer. Perhaps you do not want to expose your choice of Successor Trustees or beneficiaries while you are still alive. You do not need to. You can simply inform your Successor Trustee of where you store your trust, will, and powers of attorney, for when the time comes (e.g., when you pass away, or should you become incapacitated) and they will need those documents to undertake their responsibilities. Therefore, you can keep the information private for now, or provide copies to interested parties now, as you prefer. We do recommend, however, that you provide your Successor Trustee with contact information for Hart, Mieras & Morris, Inc. since there are important legal steps to be taken by your Successor Trustee prior to distributing your assets. We would be glad to assist your Successor Trustee in complying with the law and the directions you have laid out in your trust.

In most cases, you are not required to take any particular actions by virtue of moving out of California, although it would be wise to consult with an attorney in the new state. The living trust created by Hart, Mieras & Morris, Inc. is enforceable in all 50 states; however, state tax laws are unique to each state.  These differences in tax laws may affect the suitability of your current type of trust in the new state, especially for couples. Additionally when moving, you want to remember to put your new residence in the trust. See the tip about “Real Property (real estate).”

A Living Trust reports any income it receives on the income tax return of the trustor(s), while the trust is revocable. This usually remains true until the trustor(s) die or until someone other than the trustors is serving as the trustee of the trust. At that time, a new tax payer I.D. number (also referred to as an Employee Identification Number) is usually required by the IRS. An attorney or accountant can usually assist with acquiring this new number, if needed. If you have questions, contact your tax professional.

If the trust was created by only one individual, the Successor Trustee is well advised to seek legal assistance in determining what steps need to be taken regarding the trust. Some actions are time sensitive (from a legal-compliance standpoint), so it is wise to get legal advice soon (e.g., within a month or so) after the Trustor dies. We would be glad to assist the Successor Trustee in complying with the law and the directions in your trust.

If the trust was created by two individuals, the survivor of the two is well advised to seek legal assistance in determining what steps need to be taken regarding the trust. Jointly created trusts can have very different action steps depending on the type of joint trust. Some actions are time sensitive (from a legal-compliance standpoint) and some are time sensitive from a monetary standpoint. It is wise for the surviving trustor to get legal advice soon (e.g., within a month or so) after a spouse dies. We would be glad to speak with the survivor regarding compliance with the law and the directives in your trust.

Remember the purpose of a will (see the tip about “Wills” under “The Big Question” above). A will’s purpose is to distribute any “orphan assets” (see also “The Big Question” above, #3) that might exist after your passing. A will is important just in case you have an asset that was not in the trust, and that asset had no other mechanism for transference to a beneficiary. The wills prepared by HMM are generally “pour-over wills” which direct the orphan assets be distributed to the Living Trust. That is helpful, but, again, wills do not avoid probate. So, rather than relying on the will, it is advisable to be pro-active in funding your trust while you are living. Our hope is that the will is never needed.

No. A Living Trust (i.e., revocable trust) does not shield you from creditors. It does, however, save your beneficiaries from the time and expense of probate. If you need additional asset protection, you should consider insurance options (e.g., an umbrella policy) or possibly forming a business entity, depending on your needs and the source of the liability.