Without transferring assets into a trust, or funding it, the trust document is just a useless set of papers. A trust, at its core, is a contract – a contract between the grantor and the trustee to hold and dispose of assets in a certain way. If the trustee has no assets to command, then the trust has no effect.
What are the consequences of not funding a trust properly? Probably an angry or underserved client. That client’s intent was likely to have certain assets transferred into the trust, if they took the time and expense to create the trust in the first place. The client’s family may later have to expend the time and costs necessary to go through probate. A contested probate can lead to years of litigation and lengthy family fights. Another consequence might be that the client doesn’t qualify for public benefits. Still another, adverse tax implications. Funding a trust is a very important step in the planning process.
If your firm doesn’t handle the funding process for the client, you should be very clear with them that this is a necessary step and that they need to handle it on their own. In some jurisdictions, it may rise to the level of malpractice to not counsel clients properly on the importance of funding. Because of the high stakes, many attorneys will help their elder law clients fund their trusts. This way, the grantor’s intent is carried out, and the attorney can rest easy knowing that this crucial step was completed successfully.
Let’s take a look at how to transfer certain assets into a trust.
Most elder law attorneys know that on real property, the deed to the property should reflect something similar to this: “John Smith, as trustee of the Jones Family Preservation Trust dated January 27, 2019.” John Smith, the trustee, now owns the property. Client Jones does not. And, of course, the deed should be properly recorded and proof of this recording should be kept with the trust documents.
What if a mortgage company has a problem with this transfer? The Garn-St. Germain Act disallows a lender from exercising a due-on-sale clause upon “a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property . . . .” (12 U.S.C. § 1701j-3(d)(8).) If this statute is applicable to your case, we have a letter in ElderDocx to send to the lender informing them that they cannot call the note due. If this statute is not applicable to your case, you could refinance the property with a mortgage company who allows this type of transfer, and then fund the property into the trust. Because of this issue, many elder law attorneys prefer to contact the mortgage company prior to the transfer, to ensure no problems are looming around the corner.
The insurance carrier on the property should be contacted to re-issue a new policy in the name of the trust. The reason for this is that if the client is on public benefits and has a claim with the insurance company, the insurance company will pay the claim proceeds directly to the client. This could disqualify the client from public benefits. If a claim arises, then the proceeds need to be paid to the trustee, not the client directly.
If any rental property is conveyed to the trust, then the renters need to be informed that their future payments need to be made to the trustee, not directly to the client. Review the rental agreement to ensure this is assignment of the lease is permitted.
Certificate of Deposit (CD)
A certificate of deposit is a savings certificate that has a set interest rate and a set maturity date. To transfer a CD into a trust, you would retitle the asset, using the same format as above: “John Smith, as trustee of the Jones Family Preservation Trust dated January 27, 2019.”
Some banks may view the re-titling of the CD as a change in ownership and may require that a new CD be issued. This could result in the loss of projected interest on the financial instrument. As an attorney, you would go through a process to analyze whether losing this interest outweighs the positive effects of retitling the asset. Is the client a proactive planning or crisis planning client? How much interest will be lost? How far away is the maturity date of the CD? What is the overall value of the CD?
The government has given tax breaks to an individual who contributes money into certain retirement savings plan accounts, such as a 401k or IRA. These tax breaks are bestowed upon that individual only. Because that individual’s name only must remain on the account, a 401k or IRA cannot be transferred into a trust.
If the client is anticipating public benefits and wants to protect the money in the retirement savings account, they would have to first withdraw that money from the account and put it into another type of asset that could be funded into a trust or is otherwise protected. This would have serious tax consequences, of course.
This asset, because it cannot be funded into a trust, will need to be analyzed by an attorney in detail. Some states allow such asset to remain protected, even if on public benefits. In rare cases, the tax bill of liquidating the asset may be worth protecting the remaining balance. In other cases, the client can use the funds in the account in a tax-responsible way to pay living expenses before public benefits are needed, and protect their other assets.
A 401k or IRA account is oftentimes a major asset of an elder law client. Because of the complex laws surrounding these accounts, competent legal advice is needed before pursuing any planning strategies involving them.
Educating your staff
Many times, paralegals and legal assistants will be in charge of the funding process, with attorney supervision. Because of this, it is important that your staff know the complexities of various assets and the complications that can arise when funding a trust.
ElderCounsel is hosting a brand-new event, an Elder Law Immersion and Practice-Building Camp for Non-Attorneys, in Denver, June 12-13. One of our topics will be “How to Fund a Trust.” We will review what funding is, how to fund specific assets into a trust, and practice tips for a successful funding process.
Do you want a dynamic, competent law office? Are you willing to invest in your staff, so you can see a quick return on your investment, lasting for years to come? Give your staff the knowledge and tools that they need to be successful for you.
At the same time as this non-attorney camp, there is also an event for you, the attorney! (Attorneys and non-attorneys attend the same sessions during Day 1.) Both you and your staff can come away from this event reenergized and confident that you will provide the best representation to your elder law clients and have the marketing know-how to get those clients through the door. We hope to see you there.
Elder Law Immersion & Practice-Building Camp for Non-Attorneys
June 12-13 in Denver, CO