First of all, let’s explain what it means to “fund” your living trust since this terminology tends to confuse a lot of people. Funding your trust simply means putting assets into the name of your trust and coordinating the beneficiary forms on your life insurance and retirement accounts to match your estate planning intent.

To give you a concrete example, let’s say that you have a house, a checking account, a savings account, a non-retirement brokerage account, a 401K, an IRA, and two life insurance policies. The house, checking account, savings account, and brokerage account would all need to be re-titled to be owned by your trust. Typically, in a revocable trust, the person or persons who set up the trust (the Grantors) are also the Trustees (the ones who control the assets of the trust). The house gets transferred to the trust through a deed that gets recorded with the county recorder’s office. The bank accounts require you to go to the bank and request that the accounts are titled in your name as Trustee of your revocable trust. This is fairly simple and if you are working with us, we give you a nice funding letter and copy of your certification of trust to help you in the process.

The brokerage account gets re-titled in the name of your trust either by your financial advisor or by contacting the custodian of your brokerage account directly and requesting the transfer. Or they may send you the form they need you to fill out, sign and return to make sure the account gets transferred to your trust.

For retirement accounts, you should never transfer ownership to your revocable trust. These types of assets must be owned by an individual per IRS rules. However, you can update your beneficiary form to coordinate with the intent of your trust. This is where legal advice becomes really important. There are a few mistakes we have seen people make and there are decisions you will need to make as to where your retirement accounts go should you pass away. In most cases, leaving a qualified retirement account to a spouse makes the most sense for what is trying to be accomplished and for tax planning purposes. There are things a spouse can do with the plan that other beneficiaries simply cannot do as well. But you should always list a contingent beneficiary of your retirement plans. The options here might be to list children, charity, other family members, your revocable trust (provided you have the proper conduit provisions in the trust for stretch out by certain qualified beneficiaries), or to a Retirement Protector Trust™ for creditor protection.

Note that, because making the proper beneficiary designation is so important for retirement accounts and may involve many complex tax and individual family issues, consultation with an attorney skilled in this area of the law is highly recommended. Once you have executed a new beneficiary designation form for each of your retirement accounts and you have returned them to your plan custodians, they should return to you a letter confirming the change of beneficiaries. You should place a copy of the confirmation letters under your TRUST ASSETS tab in your estate plan portfolio (trust plan binder). Important note: you should never list a minor child as the primary or contingent beneficiary of your retirement account. If you do, the court will need to appoint a guardian at litem to take custody of the account until the minor reaches the age of 18. The revocable trust (if properly drafted with “conduit” provisions for retirement accounts) is the better option when minors are involved as primary or contingent beneficiaries. The Trustee can take over management of the retirement account and stretch out the account for maximum deferral benefits for the beneficiary. For more information on asset protection for retirement funds, see Chapter 10 on “Stretching Out Your Retirement Account for Your Children with a Retirement Protector Trust™”.

If you do not have an estate that is subject to the estate tax (remember to include life insurance in your name as part of your gross estate for estate tax calculation purposes), it is perfectly fine to list your revocable trust as the beneficiary of your life insurance. However, careful crafting of your trust is part of this process. I will give you an example to highlight this. Let’s say clients Jane and John come to my office and tell me that they are married but that this is a second marriage for each of them. Further, they tell me that Jane has a 9-year-old child from a prior marriage and that her ex-husband has a traumatic brain injury (TBI) and would not be capable of supporting his daughter if Jane died. Jane and John also just had a baby together. Jane is worried that her daughter from her prior marriage might not be cared for in the way she wishes if she died. In this particular situation, a separate trust that has a life insurance policy listing the separate trust as the beneficiary, and that is owned by Jane, is a good solution to meet her objectives. Jane’s other life insurance policy lists her joint revocable trust with John as the primary beneficiary so that John will have immediate access to the money through their joint trust if something happened to Jane. John also listed the joint trust as the beneficiary of his life insurance policy. Both Jane’s daughter from a prior marriage and their new baby together are the beneficiaries of their joint trust in the event both Jane and John die together.

The reason I pointed out this more complex set of circumstances is to highlight that it is not always a clear cut decision. In general however, if we have a first time married couple with minor children, it is best to list the revocable trust as the beneficiary of the life insurance policy, not the spouse (depending on the marital tax plan set upon the trust). If you do so, your revocable trust terms will govern what happens to the policy proceeds if you die. It is advisable for you to contact the insurance agent that sold you the policy to ensure that the proper paperwork is filled out and signed to change the beneficiary or add your trust as a contingent beneficiary. If you have children, this is particularly important. We have often seen parents of minor children list their spouse as primary and their minor children as the contingent beneficiaries. The problem with this is that it will force court intervention. No insurance company will willingly write a large check to a person under the age of 18. This means a guardianship needs to be created and the guardian approved by the court must make annual accountings to the court regarding the insurance proceeds, in most cases. Guardianships are long, expensive and they lack private control. Even worse, the money is not even protected once the child reaches 18 from their immature decisions or from their creditors. He or she could take the money, go on a shopping spree or just fritter it away and skip college. These are all bad things that with simple estate planning can be avoided.

If you have a trust that needs to be reviewed and restated or you need to establish your trust, please reach out to our intake department at (760) 448-2220.

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