Fund Your Trust!

The following article summarizes the conversation with Amar Shah, Founder of Client First Capital, and Alex Rodriguez, Principal Attorney at Rodriguez Law Offices, as they discuss the importance of funding a trust.

Amar: Something I see often is that clients have created what I call a “fancy trust” in a binder that will sit on their bookshelves. It looks amazing, but they never went through the process of actually funding the trust. Why is having a trust, and it not being funded not enough?

Alex: I am glad you asked that. That’s something I’m really passionate about. When I’m working with my clients, I’m constantly repeating this. I like to say that there are two steps when you’re creating a trust. It’s not just the fancy binder and the documents, which are an important component. That’s only step one. Then there is a second step once you have it created. To demonstrate the idea, I use a fancy little jar as my prop and explain that this jar is your trust. You created it on the pottery wheel, and it’s all set and pretty. Now, you don’t want to just put it on the shelf and never think about it again — you have to fund the trust. Now, these are your house keys, your home, you’ve got to put it into the trust. Unless it’s actually physically in the trust, your trust does nothing.

I’ve had a lot of clients come to me who have an existing trust. They have this fancy, pretty thing, but all the assets are outside the trust. Well, that doesn’t do you any good.

Amar: And beyond your house, there are bank accounts, investment accounts, and other things that individuals never change the title to their trust. There are a couple ways of doing this, right?

Alex: Right. There are basically two ways up the mountain when funding a trust. I always like to break it down into at least two choices to give clients. The first way, which is the preferred way for a lot of attorneys, is that you physically change the ownership to put it inside of the trust. Another way of doing it is to name the trust as the beneficiary, either the primary beneficiary or a contingent beneficiary. A example of that is with life insurance policies. You already own the policy, but we need to make sure that upon your death, that policy gets funded into the trust. The easiest and best way of doing that is to name the trust as the beneficiary and upon your death, that life insurance policy would get put into the trust. That’s where working with financial advisors is so important for estate planning attorneys, because we rely heavily on the advisor to assist the client as well and guiding them through this process. There’s only so much we can do, because the client actually has to physically sign and do some of that legwork. It becomes really important to have your team set up so that everyone is communicating with each other and discussing the best approach for each individual.

Amar: I can imagine it’s hard to be in your position because you don’t work at the institution. Every bank has their own form, every financial institution wants to see a certain way in regard to their certificate of trust. What’s the best way to do this? How would you suggest going about the process?

Alex: The best way is to first break it up into a few components. Usually, the attorney will be the one who helps their client with the house. For a lot of individuals, their home is a big-ticket item, and the attorney should be helping you with that. The next step is going to be bank accounts and investment accounts. You should be talking with your advisor and your attorney to make a game plan. For bank accounts, the easiest way to do that is to go into your local bank, and tell them, “I just created a trust, and I have a bank account with you. I need you to help me change the ownership from my name into my name as the trustee of my living trust.” That gets the ball rolling, and the bank rep should let you know the things that need to be done to make that happen for you.

There are also tax deferred accounts. We’ll just say those need to be treated with white gloves. That’s a whole different article.

One of the most common things requested is a certification of trust. We’re lucky, at least in California, there is a probate code that says third parties, like banks, have to accept a certification of trust as proof of a trust. Why can’t you just waltz into the bank and say, “I have trust, please change the ownership of it.” The reason is that they need proof that you actually have your trust in place. One way of doing that is to take that entire trust document and hand it over to the bank and say, “here it is, grab the information you need from that.” However, oftentimes people don’t want to be sharing this very private document and you don’t have to. In California, we do have a probate code that says, banks have to accept what’s called a certification of trust. This is a short document that basically lists all the primary things that a third party would need to know, like what the name of the trust is, who the people who created the trust are, who the trustees and the successor trustees are, whether it is revocable, etc.

Here’s a trick question that often trips up my clients. If you’re at your bank, and the bank says, “Okay, great, we have your certification of trust. We know that you have a trust, and we know that you want to change the ownership of your bank account into the name of the trust. What is the taxpayer ID number of the trust?” Don’t get tripped up on this. It’s your social security number, because your trust is basically you. It’s revocable, it doesn’t really exist for tax purposes, or the IRS. It’s you.

So, that’s the first way of funding your trust. That would be the changing of the ownership of an account.

Amar: That certificate of trust document is so important.

Alex: It’s extremely important and if you do have your estate planning binder at home, you put a little sticky tab on your certificate of trust document. You’ll probably be using that the most after you’ve created your trust.

Let’s move onto the other way of doing funding your trust. Oftentimes, clients will say to me, “well, I have my checking account with all of my auto pay and direct deposits set up and the bank has informed me that if I change my account into the name of my trust, I will get a whole new bank account number and I have to start from scratch again and that’s a pain in the butt.” For that situation, though my preferred method is still to change the ownership into the name of the trust, there is a path to leave it in their name, and go with Plan B.

Plan B is to change the beneficiary. For accounts, you should be able to name what’s called a TOD, a transfer on death, or a POD, which is a payable on death beneficiary for your account. Instead of changing the ownership, you’re basically naming your trust as the beneficiary of that bank account. We still accomplish the same purpose of upon your death, it will get routed into your trust.

What’s important is that you need to have a complete estate plan. If you’ve chosen Plan B and then end up in a coma, your trustee isn’t going to have access to your account since it’s not titled in the name of the trust. That’s where you need your financial power of attorney.

The takeaway here is that it’s really important to have your comprehensive plan in place.

The content of this article is for legal education and marketing only and should not be considered advice. It does not take your situation into account. If you have specific questions needs in this area for your situation, please reach out for professional advice.

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At Client First Capital, we help you build and maintain a secure financial future for your family by providing integrated wealth management solutions aligned with your values and family dynamics. Contact us by sending an email or filling out our contact form.

Rodriguez Law Offices is a San Diego law firm committed to providing client services in the areas of Estate Planning, Trust Administration, and Probate. Contact the offices by calling 619-238-5270 or visit www.sandiego-estateplanninglawyers.com.