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Funding and Administering Your Trust
Ronald P. Adams
People have various reasons for creating trusts, the
most common of which are: (a) to avoid a probate administration on death or in
the event of lifetime disability; (b) to obtain favorable estate tax
consequences; (c) to provide for asset management; and (d) to provide for the
distribution of assets during the administration of the trust and at its
As trustee, you will be most concerned with the
administration of the trust. If estate taxes are to be reduced or eliminated, it
will be the terms of the trust instrument which will obtain this benefit. If
probate avoidance is the goal, it will be obtained by the transfer of assets to
the trustee upon creation of the trust and as additional assets are acquired by
As creator (settlor) of the trust, you will want to
understand the process of transferring assets. This is essential if probate is
to be avoided. In effect, the settlor of a trust is transferring property while
he/she is capable of doing so rather than leaving assets in his/her name to be
cleared through a probate administration at his/her death. Under present Arizona
probate procedures, it is much easier for a living individual to transfer
his/her own property than for a personal representative to do so after death. A
living individual has freedom to act with his/her own property; a personal
representative or administrator is limited by a will, if any, by statute, by
court procedures and by the taxing authorities.
These guidelines are designed to explain the transfer
process and to be of assistance to the individual trustee in administering a
Funding the Trust
Properly funding the trust is crucial. The trustee can
only work with the assets which have been transferred to the trust. In addition,
a probate administration can be avoided with regards to all assets which are in
the trustee's name at your death or in the event of a disability which would
otherwise require a supervised conservatorship by the probate court. To the
extent that any assets in your name are overlooked and are not transferred to
the trustee prior to your death or disability, those assets will be subject to a
probate administration of your estate and be distributed pursuant to your will.
Your attorney can handle most or all of the initial transfer of assets for you.
Nevertheless, you should be familiar with the transfer process, especially since
assets acquired after the date the trust is created must be placed in trust.
The discussion which follows covers various methods of
funding or entrusting the types of assets most commonly owned by settlors,
pointing out the advantages and disadvantages of each approach.
Securities. Where all of the active trustees are
individuals (i.e., there is no bank involved), and when it is not expected that
the registered securities held in the trust will be traded actively, the most
common method of funding registered securities is to place them in the name of
the trustees as trustees of the specific trust.
Registration or re-registration of securities in this
manner is not difficult, but there may be some delay upon transfer of a security
so registered while the requirements of the stock transfer agent are satisfied.
This delay postpones receipt of the proceeds of sale, and in a changing market,
may result in a smaller gain or a larger loss than you anticipated. While steps
are being taken nationally to ease transfer requirements where trusts are
involved, transfer agents still proceed with caution in such cases. Although it
is not usually required, it may be necessary to provide the transfer agent with
a copy of your trust agreement. Sometimes a transfer agent will accept in lieu
of the trust a synopsis of the key trust provisions, a Certificate of Trust
Existence and Authority.
If significant transfers of registered securities are
anticipated, and speed of transfer will be critical, it may be preferable to
create a separate partnership to hold title to the securities. The partnership
agreement is prepared in addition to the trust agreement for the sole purpose of
holding the title to trust assets. The Trustees may also be the partners in such
a partnership, which can greatly simplify the ease of transferring properties.
Generally, all of the trust assets can be registered in the name of the
partnership. Operation through two entities (i.e., a partnership and a trust)
may be confusing to the uninitiated, and you should not hesitate to us.
Still another method of holding securities is the
broker's street name account if there is considerable trading activity. This is
the simplest approach of all those discussed. However, this device is available
only when the trust maintains sufficient trading activity from the broker's
viewpoint to justify the street name account, and very few trusts qualify.
Please remember that stock held in a street name account can be used by the
stock broker for its own use, thus exposing your assets to greater liability.
For this reason alone, you may wish to avoid the use of a street name account.
Unregistered securities — i.e., those in bearer form —
present no particular transfer problems, and obviously there are no registration
problems. A short form of assignment from the settlor to the trustee of the
specific trust should be executed. This assignment should describe the property
with some specificity to adequately evidence the settlor's intent that it be
considered a trust asset.
Real Estate. Conveying real estate to trustees
leads to many of the same problems encountered in entrusting securities. One
reason is that the trust agreement defines the limits of the trustees' power to
deal with the real estate, and a prudent purchaser, lessee, etc. may demand
proof of the trustees' powers, which proof might include recording a copy of the
A workable solution which is commonly adopted is to
prepare and record a Certificate, to be signed by the settlor, which contains
pertinent excerpts from the trust agreement, including the identity of the
settlor, trustee and successor trustee, a description of the mechanism by which
the designated successor trustee becomes active, a statement of the trust's
revocability, a listing of powers given the trustee, particularly the power to
sell, mortgage and make improvements and leases with respect to real estate, and
finally, a recitation of any exculpatory provisions in the trust agreement
designed to protect purchasers.
When the Certificate has been recorded, the settlor may
then deed the real estate to the trustee in his/her capacity as such. Another
approach involves creation of a partnership to hold title to real estate on
behalf of the trustees. The advantages of this approach were discussed
Out-of-state real estate poses a special problem, since
in many cases a corporate (i.e., a bank) trustee or successor trustee from the
state of the settlor's residence will not be empowered to act in the state in
which the real estate is located. This may preclude a conveyance to the trustees
and necessitate use of the partnership. However, a provision which is included
in your trust allows the trustee to appoint an out-of-state trustee to manage
such property which will alleviate this problem.
Any transfer of real property from the settlor to the
trust must meet various requirements of common law. This is especially true if
your property is held in joint tenancy with right of survivorship and should be
done by a person with knowledge and experience in real estate transactions.
Any interest in real estate less than absolute
ownership, such as an Agreement of Sale or a lessee's interest, may also be
assigned to the trust. The terms of the Agreement of Sale, lease or other
relevant document should of course be reviewed to assure that assignment is
Prior to any transfer of real property, any and all
encumbrances should be reviewed to ensure that the transfer will not violate
their provisions or trigger a due on sale clause. This also applies if the
interest is pursuant an Agreement of Sale, or a lease, which may prohibit the
transfer of the property.
Tangible Personal Property. Since tangible
personal property, such as household furniture and furnishings, jewelry, etc.,
is without any recognized documentation of title, funding of this property is
approached in the same manner utilized in funding bearer securities, i.e., a
simple assignment from the settlors to the trustees. However, since this
property changes constantly, and continuous additional assignments would be
impractical, the initial assignment should cover "any and all tangible personal
property now owned or hereafter acquired."
Bank Accounts. A checking account will need to be
opened in the name of the trust. All income and expenses for the trust should be
deposited in or paid from this account so that the check register will be a
complete accounting record of all transactions of the trust. Time certificates
of deposit and long-term savings accounts can be registered in the name of the
trust or the partnership.
Life Insurance. In the usual case, insurance on
the settlors' lives will be made payable to the trust. If the settlors are the
owners of the insurance, no changes other than the change of beneficiary need be
made, and the settlors retain all ownership rights.
Retirement Benefits. The "guaranteed" portion of
any retirement benefits, as opposed to benefits terminating at the settlor's
death, may be made payable to the trustees in the same manner as life insurance.
There are two methods to name the trust as recipient of retirement benefits,
depending upon the terms of the extension trust. The trust is named either in
the insurance policy, if one exists, or by completing a document called a
Designation of Beneficiary Form. Designating your trust as a beneficiary of your
retirement benefits, however, may preclude the use of various income tax
elections to defer, or reduce the income tax liability to the recipient.
Therefore, before naming the trust as your beneficiary, you should consult with
your accountant or attorney. This also applies to individual retirement
Identifying the Trust for Tax Purposes
The IRS exempts your trust from filing all income tax
returns so long as you report all income, gains, and losses on your personal
return. The trust is not treated as a separate taxable entity, and you will not
lose any income tax advantages by holding assets in the name of the trust. For
example, the transfer is non-taxable, your basis in the property is not
affected, and the exclusion of $500,000.00 of gain (if you file a joint tax
return) on the sale of your residence is still available if you otherwise
Upon the death of a settlor, the trust will become a
separate taxable entity and will be required to file fiduciary income tax
Protecting Trust Assets
Once the trust agreement has been signed and assets have
been transferred to the trust, the trust agreement is fully operative as to
those assets. At this point, there are certain basic steps to be taken by the
Any assets that have been transferred to the trust which
should be covered by insurance should be so protected. If insurance is already
covering a trust asset, the insurance policy should be revised to add the
trustees as named insured on the policy. This can usually be done at no
additional cost. If personal property, a residence or an automobile has been
transferred to the trust, the trustee should make sure that such assets are
covered by insurance and that the trustee is a named insured.
Assets such as stocks and bonds which have been
transferred to the trust should be placed in a safe place, such as a safe
deposit box. If the safe deposit box holds only trust assets and is in the name
of the trustees, there will be no problem in identifying bearer bonds or
unregistered securities as trust assets. There will be a problem if the box is
taken out in the settlor's name alone. If the settlor successfully transfers all
of his/her assets to his/her trust, he/she will have no probate estate and will,
therefore, have no Personal Representative. However, on his/her death or
disability there will also be no one who has immediate authority to enter the
safe deposit box. To facilitate identification of trust assets and to permit
easy access to the safe deposit box on the settlor's death or in the event of
his/her disability, the box should be held in the name of other members of the
settlor's family as well as in the name of settlor.
Administering the Trust
As the trustee, you are the legal owner of the trust
assets. If more than one trustee is acting, the trustees own the trust assets
with survivorship rights similar to those of joint tenants. Property held in the
name of trustees will pass to the surviving trustees and any successor trustees
upon the death of a trustee. If more than one trustee is acting, the trustees
must act together unless expressly provided to the contrary by the trust
agreement. As trustee you are not acting as the agent of the beneficiaries of
the trust. Your actions are your own and you are responsible for them.
Of critical importance in the creation of a trust is the
trust agreement. This is the instrument which instructs you, as the trustee, how
to manage, administer and dispose of the assets which are transferred to the
trust. These guidelines are directed primarily at the revocable trust situation,
where the trust was created by you primarily to avoid probate, and you are the
trustee or co-trustee (often with your spouse or another family member), and are
also the primary beneficiary during your lifetime.
The settlor of this type of trust has much of the
freedom in dealing with his/her assets after they are transferred to the trust
as he/she had before the transfer. As settlor and trustee of this type of trust,
your wishes as to the management and disposition of the trust assets will
control during-your lifetime. Nevertheless, there are certain basic obligations,
such as the duties to keep records and to segregate trust property, and to file
any required tax returns. The exercise of these functions reflects the fact that
the settlor intends the assets to be part of a trust arrangement under which
other parties have interests.
Record Keeping. Even where the settlor is the
trustee of a trust for the settlor's benefit, a trust cannot be set up and
funded and then forgotten. The trustee has a responsibility to keep accurate
records concerning the trust assets. Books should be set up, with the help of an
accountant if necessary, to identify (1) income received, (2) income paid out,
(3) additions to principal, (4) deductions from principal, (5) principal on
hand, and (6) changes in trust investments.
All transactions involving trust assets should be
carefully documented. When the trust books are originally set up, the cost basis
of all assets transferred to the trust should be determined. It is much easier
to obtain this information while the settlor is alive and his/her records
available than to try to track down such information at such time as assets are
sold or otherwise transferred.
In addition to satisfying the trustee's legal
responsibilities, accurate books and records will make the successor trustee's
job much easier. A trustee should not feel burdened by accounting
responsibilities which he/she is unable to handle. An accountant should be
retained when required, or the settlor may consider utilizing the services of a
bank, which may be the successor trustee, or custodian (as opposed to trustee)
of the assets.
Segregation of Trust Property. The trustee has an
obligation to segregate trust property. If trust property is commingled with the
trustee's own property, the duty will be on the trustee to prove that which is
his/her own. Any doubt will be resolved in favor of the trust.
In the creation and funding of a trust, you have adopted
a sophisticated estate plan. A great deal of thought and effort were devoted to
the creation and funding of your trust. If at this point you simply forget about
the trust, many of the benefits which it would otherwise afford you will be
lost. A trust does not require a great deal of continued attention, but it does
require periodic review and monitoring.
If you familiarize yourself with the requirements and
guidelines set forth above, you should be able to maintain the full
effectiveness of the trust with minimum effort. However, questions may arise
from time to time which you are unable to answer, and in this event, you should
not hesitate to call upon us.