You may already have a trust, but it’s very important to understand that once you make a trust, the job is only half done. For your trust to work as advertised, it must be funded with your assets. Today’s column is about doing just that. As a rule of thumb, everything goes into the trust, with a few exceptions.
First, keep your day-to-day checking account outside of the trust and add your successor trustee to the title of the account as a joint owner. If you are married, keep the account in both of your names and wait to add someone to the account when either of you starts slowing down. You know, when you no longer read your mail, pay your bills, and read this column.
If you do not like the idea of adding someone to your checking account, then maybe you need to reconsider whether or not that person should be named as successor trustee. If you can’t trust someone now, don’t you dare trust that person when your incapacitated or dead.
Second, don’t bother transferring into the trust your automobiles and boats registered with the DMV, or modular homes registered with the Department of Housing. They do not count against the $150,000 limit that triggers a requirement for probate administration in California, so there is no real need to do this. These assets can be collected 40 days or more after your death using DMV Form REG-5 or a Small Estate Declaration under Probate Code section 13101.
Third, and perhaps most importantly, you cannot transfer to your trust retirement accounts such as IRA’s, 401(k)’s, 457(b)’s and the like. These are tax-deferred retirement accounts. Transferring one to a trust means cashing it in and paying all that income tax. In addition, you probably should not name your trust as a retirement account beneficiary unless your lawyer advises you to do so. Instead, name your children or other beneficiaries directly, unless you have a minor or disabled beneficiary who should not or cannot have direct access to the money upon your death.
Incidentally, life insurance and annuities can go either way. You can name the trust as beneficiary, or name beneficiaries directly. Sometimes it’s good for them to pay into your trust, to give the trustee more liquid cash while consolidating and selling those of your assets that will be sold.
Other than that, everything should be in the trust. Your lawyer should prepare and record deeds conveying your California real properties into the trust. The rest is up to you. Most lawyers provide their clients with a fancy three-ring binder with the law firm’s name emblazoned in big letters (We do this too). Use that binder as a tool. When you visit your bank or broker to fund your trust, take the trust binder with you. It should have everything you need, and financial institutions are well aware of how to title accounts in a trust, although they will abbreviate the name of the trust. It’s OK. They know what they are doing.
If you do all of this, and fund your trust correctly, then when you pass your successor trustee will have an easier job to do, and it will save your family money.