One of the questions I’m often asked by people who own trust is, “what belongs in my trust?” or “what assets should be registered in a trust?”
What is a living trust?
It is a written legal document that partially substitutes for a will. With a living trust, your assets are put into the trust, for your benefit during your lifetime, and then transferred to your beneficiaries when you die. (1)
As you know, trusts can be a good thing to have because they can often eliminate the cost, expense, and lack of privacy of probate.
They also clearly spell out what happens upon death, and can be very simple or as detailed as the drafter of the trust chooses.
So now that you’ve done a good job in getting a trust, what goes in my trust?
First, most valuable assets should go in the trust. First and foremost, you probably want to register house and other real estate you may have in the trust.
How to Register Your House or other Real Estate in Your Trust
To do this, you can have your attorney do it, or do it yourself. If you have the time to fill out some forms and do a little research, you can do it yourself. Instructions are on most county websites. For example, this info from the Sacramento county law library recommends the following steps to transfer real property to your trust. (3)
- LOCATE THE CURRENT DEED FOR THE PROPERTY– can’t find it? Order a copy from the county recorded. Small charge and usually takes about ten days. You will need it.
- DETERMINE WHAT TYPE OF DEED TO FILL OUT – for trusts; it will be a grant deed rather than a quitclaim deed to transfer to a trust.
- DETERMINE HOW THE NEW OWNERS WILL TAKE TITLE. Like changing from joint tenants to your new trust.
- FILL OUT THE NEW DEED (BUT DO NOT SIGN)
- CURRENT OWNERS OR DISCLAIMING PARTIES SIGN THE DEED IN FRONT OF a NOTARY.
- FILL OUT THE PRELIMINARY CHANGE OF OWNERSHIP REPORT– again, you’ll be changing from joint tenants for example, to the trust.
- RECORD THE DEED AND FILE THE PCOR AT THE RECORDER’S OFFICE – The Recorder’s Office charges a recording fee.
- FILE ANY REQUIRED PROPERTY TAX REASSESSMENT EXCLUSION CLAIM IN THE ASSESSOR’S OFFICE.
This means your property won’t be reassessed for tax purposes (which could increase your taxes) because changes in the holding of title but not ownership do not require a reassessment.
How can you tell if your house has been registered in your trust?
Look at your property tax bill.
People who have had trusts for years may want to confirm that their house is in fact in their trust. To find out, just get a copy of your tax bill and read it, or log on to your tax collectors site and do a search.
Your name should somewhere list Trust, or may abbreviate it as TR. This way, you know you’re covered.
What else goes in your trust?
Stocks, bonds, and brokerage accounts that are NOT retirement accounts should probably go in your trust.
To do this, simply contact your broker or advisor and he or she should be able to produce the documents. (and do help you complete the paperwork at no charge)
While you may need to provide the advisor with copies of the pertinent pages of the trust – usually the first couple of pages that state the name and date of the trust, trustees – and the last page which shows the notarized signatures, brokerage firms now simply have their own trustee certification forms.
This short form is complete in lieu of you having to provide your advisor with trust copies, and you simply list the name and date of the trust, the tax ID number, and the trustees sign. These forms also typically have a checklist as to what rights the trustees have, and whether or not the trustees can act independently or not.
This can be an important point if you have trustees that live far apart where obtaining signature is not always easy. This is often the case with widowed retirees who may have their adult children as co-trustees.
Do I need to notify my lender if I have a mortgage on my house that it’s going into a trust?
Probably not, but it may avoid confusion in the future. The loan was made to you personally and the lender will generally not register the loan in your name, although they will allow the property to go into the trust without a problem.
What about IRAs and Retirement accounts?
Trusts cannot own IRAs and retirement accounts because by law, such accounts must be owned by a participant. So be careful not to try this maneuver because if an incompetent attorney or advisor submits paperwork to take your name off a retirement account and the
trustee is foolish enough to actually do this, you could immediately create a taxable event.
Unlikely, but don’t try it.
Trust as Beneficiary
You may make the trust the beneficiary of your IRA or retirement account, but it’s generally better to have individuals as primary beneficiaries to allow for a “stretch IRA” option, and list the trust as a contingent beneficiaries.
Some IRA trustees may “look through” the trust if it’s property written, but some will not. Better to not tempt fate unless you’re very clear about this provision and use individuals (as many as you want) as primary beneficiaries.
Annuities and Insurance Policies?
Any asset that allows for a designation of a beneficiary generally avoids probate. So if you don’t have a trust but own annuities and/or insurance policies that allow you to specify your beneficiary, those assets will pass on death directly to the people listed. No probate.
What about ownership of an annuity or insurance policy?
You may be wise to have the annuity owned by the trust. Not to avoid probate but because if the owner becomes incapacitated and cannot act, the trust will have successor provisions that will avoid family members having to go through the process of obtaining a power of attorney.
Taxes and the Cost Basis
Besides saving probate expense and time, there can be an important tax benefit if a couple holds an asset in a trust rather than joint tenancy with appreciated property.
John and Mary paid 100k for a house that’s now worth 500k. As joint tenants they each own half, and therefore, have a 50k basis are sitting a 250k house each. If John dies, his half gets stepped up to the current value of 250k. Mary goes to sell and now gets no such step up and
has a 200k gain on her half.
Had they owned this asset in trust, the entire house would have received a stepped up basis on death. (4)
IF you don’t have a trust, there are other techniques to avoid probate. TOD (Transfer on Death) registrations are now allowed at most banks and brokerage firms. In short, this allows you to appoint a beneficiary on your individually held asset. Upon your death, the asset passes to the beneficiary upon your death
How many beneficiaries?
As many as the form will allow, and more.
What does NOT go into a living trust?
Property of little value : Such property may not need to go through probate or it may have a quicker process.
Personal checking accounts Checking accounts sometimes don’t go in a trust because money goes in and out of them so frequently. But there may be good reasons for elderly people who have co-trustees, accounts with large balances. It’s also a good idea to have a bank account that matches your brokerage account. This way, if you get a large check payable to your trust, you can cash or deposit it. Banks no longer allow you to deposit trust checks in your personal account.
Property you buy or sell frequently : This is important if you do not expect to own the property when you die.
Cars : Most cars are not very valuable, and insurance companies may not want to insure a car owned by a trust. If your car is valuable, check with your insurance company before putting a car in your trust.
IRAs, 401(k) s, etc .: These accounts can’t be owned by a trust but money from them still avoids probate if you designate a beneficiary.
Life insurance: Life insurance proceeds are distributed according to your policy. The beneficiary named in that policy will receive the money.