A. The Role of the Revocable Trust in the Two-Part Estate Plan.

One important objective of “estate planning” is to minimize estate settlement costs, such as probate administration costs and estate taxes. Probate administration is the court-supervised legal process for managing the property of deceased and incompetent persons. For example, upon your death, the probate court appoints the executor named in your will, who is responsible for making an inventory of your “probate” assets (i.e., assets owned by you individually that are not automatically payable to someone at your death), paying your outstanding debts and final expenses, and then distributing the remaining assets in accordance with your will. The purpose of the probate process is to provide an orderly and centralized process for protecting the estate and distributing it to those entitled (i.e., both beneficiaries and creditors). However, the probate process can be costly and time-consuming. Moreover, all of the probate filings, including a complete inventory of your probate assets and their values, are public records.

One popular way to reduce probate administration costs is a two-part plan involving a “revocable trust” and a coordinated “pour-over” will. The revocable trust, and not the will, is the primary estate planning document. It describes how you want your property to be distributed at death. That is why the revocable trust sometimes is referred to as a “will substitute.” The pour-over will plays the secondary role of simply transferring “probate” assets into your revocable trust after your death, to be distributed along with the other trust assets.

Because a revocable trust is a separate legal entity that does not die when you do, assets owned by the trust need not go through probate administration at your death (or upon your incompetence, for that matter). Therefore, a revocable trust can reduce probate costs and avoid the delays and publicity of probate administration, but only if you “fund” the trust during life. “Funding” your revocable trust simply means re-titling assets that otherwise would be subject to probate administration at death into the name of the revocable trust. It also may involve having things like life insurance and other benefits paid to the revocable trust upon your death.

B. How Do I Fund the Trust?

If you are married and you and your spouse have separate revocable trusts, you must first decide which assets, if any, you will continue to hold as joint tenants with rights of survivorship and how your remaining assets are to be divided between you and your spouse’s trusts. Those decisions should take into consideration any estate tax and other objectives you and your spouse are trying to achieve. Once you have done this (or if you are not married or if you and your spouse have a joint revocable trust), then you must re-title your assets into the name of your trust or, with respect to certain assets, name your trust as beneficiary.

Typically when transferring an asset into the trust, title is held by the trustee(s). Therefore, when re-titling assets, you will name the trustee(s), followed by the name and date of the trust, as follows:

[Name of Trustee(s)], Trustee(s) of the [Name of Trust] dated [Date of Trust Instrument].

To designate your trust as the beneficiary of an asset (such as life insurance -- but see 7 below), you may word the beneficiary designation as follows:

The then serving trustee or trustees of the [Name of Trust] dated [Date of Trust Instrument].

However, the instructions to a particular beneficiary designation form may provide the required wording for naming your trust as beneficiary.

The particular method for re-titling an asset will depend upon the asset itself. Below are the methods for certain types of assets, as well as issues you should consider with respect to those assets.

     1. Real Estate.

          a. In General. Normally, an attorney will prepare deeds and any other documents necessary for you to transfer your real estate interests into your revocable trust. You should provide your attorney with photocopies of your recorded deeds.

          b. Mortgaged Real Estate. If you are considering transferring mortgaged property or property securing a loan or line of credit into your trust, you or your attorney first should contact the lender and obtain the lender’s written consent, to avoid triggering a “due on sale” or other debt acceleration clause in the loan agreement. Some lenders charge administrative fees to review and “process” the request. Some lenders have specific documentation requirements that you must meet before they approve the transfer.

          c. Out-of-State Real Estate. If you own real estate outside the state where you are domiciled, it is particularly important to transfer it to your revocable trust. Otherwise, there may be “ancillary” probate administration in the state where the real estate is located. Like “domiciliary” probate, ancillary probate involves expenses and delays. Your primary estate planning attorney very likely will work with legal counsel in the other state to review and prepare the necessary documents for the transfer.

          d. Owner’s Title Insurance. If you have owner’s title insurance (as opposed to title insurance that you purchase for a lender if you financed the purchase of real estate), you may lose the benefits of that insurance when you transfer the property to your revocable trust. It may be advisable to transfer the property via a warranty deed (as opposed to a quitclaim deed) or to purchase an additional insurance rider. You should discuss this with your attorney and provide him or her with a copy of your existing title insurance policy.

          e. New Hampshire Real Estate Transfer Tax. New Hampshire imposes a $40 real estate transfer tax per deed for New Hampshire property being transferred into or out of a revocable trust.

          f. Massachusetts Recording Costs. Whenever Massachusetts real estate is conveyed to a trust, it is typical Massachusetts practice to record the trust as well as the deed. To avoid recording and thus ensure the privacy of your revocable trust, typically your attorney will recommend that, instead of conveying your Massachusetts real estate to your revocable trust, you convey it to a so-called “nominee” or “realty” trust instead. The beneficiaries of the nominee trust, which are identified on a separate schedule that does not get recorded, are your and/or your spouse’s revocable trust. Thus, as beneficiary of the nominee trust, your revocable trust is the (indirect) owner of the Massachusetts real estate. Because the property is held in the nominee trust, it avoids probate. And the privacy of your trust is maintained, because neither is the revocable trust nor the schedule of beneficiaries recorded. However, the current cost of recording a trust is quite high. Currently, the recording cost for the nominee trust is $225. On top of that, the recording cost for the deed into the nominee trust is $125.

     2. Stocks and Securities.

          a. Publicly Traded Securities. Securities held in “street name” in your brokerage account are easily transferred to your revocable trust. Contact your stockbroker with instructions to re-title the account into the name of your revocable trust. You will find that most brokers are familiar with this process and will prepare the necessary paperwork for you. Transferring any original stock certificates that you do not hold in stock brokerage accounts is a more difficult task. Your attorney should be able to help you with this cumbersome process (including the preparation and delivery of transfer instructions, stock powers with medallion signature guarantees, trustee’s certificates, etc.).


          b. Family Businesses. You can transfer your interests in “closely held” businesses by having your corporate or estate planning attorney prepare the appropriate documents.

          c. S Corporations. Your closely held corporation may be classified as an S (also called a “subchapter S”) corporation for federal income tax purposes. The S corporation rules strictly limit the types of trusts that can own stock an S corporation without jeopardizing the corporation’s S corporation status. Your revocable trust is an eligible shareholder for as long as you are living, and upon your death, it automatically will continue to be eligible for a period of 2 years. Thereafter, if the stock is to continue in trust, the trust must contain special provisions to be an eligible S corporation shareholder. Be sure to discuss this with your attorney. The income tax consequences of an inadvertent S corporation termination can be severe.

          d. Professional Corporations. If you are a professional doing business in the corporate form as a “P.A.” or “P.C.,” be aware that New Hampshire law does not allow the stock of a Professional Association or Professional Corporation to be owned by a revocable trust. Similarly, New Hampshire law does not allow a revocable trust to be a member of a professional limited liability company, or “P.L.L.C.” Therefore, interests in these entities cannot be transferred to the professional’s revocable trust. However, it may be possible to designate the professional’s revocable trust as a beneficiary or successor owner upon the professional’s death.

     3. Tangible Personal Property. Transfer your untitled tangible personal property (i.e., tangible personal property for which there is not formal ownership document, such as furniture, household effects, jewelry, furs, etc.) into your trust by signing a Deed of Gift or Transfer which your attorney can easily prepare. Or the trust document itself may indicate that you are establishing the trust by funding it with your tangible personal property. There is no requirement that this deed or the trust instrument provide a detailed listing of these tangibles; however, it may be a good idea to do so to provide an inventory (and perhaps a memo describing your desired distribution of the tangibles) to allow for their easy identification and distribution after your death. Separately transfer vehicles, boats, and all other personal property that have a certificate of title. Typically it is more convenient to re-title vehicles and boats into the name of your revocable trust upon renewal of your registration. At that time, simply sign the back of your title certificate over to your revocable trust, just as you would if selling the property to any third party, and bring it and the first and last pages of your revocable trust, as described in C. below, to the town clerk. You will be reissued a new title certificate (for a fee) in the name of the trust, and the registration period will be based on the date of the trust.

     4. Certificates of Deposit and Bank Accounts. Some banks will allow you to re-title a CD into the name of your trust before maturity, without penalty. However, you may find it easier to re-title CDs upon maturity. You can change your checking and savings accounts at any time. To re-title CDs and other bank accounts, simply bring copies of the first and last pages of your revocable trust (see C. below) to your local branch office and speak with the customer service representative about re-titling the account(s). For checking accounts, the checks themselves need not have the name of the revocable trust printed on them; in fact, we recommend that they simply have your name on them.

     5. IRAs and Tax Qualified Retirement Plans. For married persons owning IRAs, SEP, 401(k) plan assets, and other qualified pension and profit sharing funds, it is often prudent planning to name the spouse as the primary beneficiary and your children or revocable trust as your secondary beneficiary, perhaps with the spouse having the power to disclaim the interest in favor of the revocable trust if tax planning considerations at the time of death warrant it. Having individual beneficiaries, and not your trust, succeed to a substantial retirement account balance might allow them the flexibility to continue the growth of the plan balance in an income tax sheltered solution for a significant period of time after your death. This flexibility might be reduced if the trust is the designated beneficiary.

Beware: The law in this area is complex, and there are several traps for the unwary. Discuss these issues with your estate planning attorney. Satisfy yourself that he or she understands and has planned for these complexities.

     6. Insured Property. Contact your insurance carriers if you are considering transferring insured property (most notably automobiles and real estate) into your revocable trust. Be certain that both the individuals who use the property and the revocable trust, which owns the property, are named as the “insureds.” Confirm with your insurance agent that revocable trust ownership will not result in higher premiums under some fine print in the policy.

     7. Life Insurance Policies. Obtain change of beneficiary forms for any life insurance policies from your insurance agent or directly from the insurance company. Your revocable trust normally should be designated as the primary beneficiary with individuals as the contingent beneficiaries. Your insurance agent or your attorney can assist you with changing the beneficiary of your policies.

C. What If a Stranger Asks for a Copy of My Trust?

When transferring your assets into your trust, you may encounter requests from banks and other companies including stock brokerage firms, stock transfer agents, mutual fund companies, etc., for a copy of the entire trust instrument. However, it sometimes will suffice for you to give them a copy of the first page identifying you as the one who established the trust and date you signed it, the signature page showing that the trust was, in fact, signed, and, occasionally those pages that describe the trustee’s administrative powers. There is no reason for outsiders to see other parts of the trust that contain sensitive, personal information about how your property is to be distributed upon your death. Remember, one of the advantages of having a revocable trust and avoiding probate is to keep your affairs private. You should advise your attorney if someone asks for a copy of the entire trust instrument and you do not wish to provide it. Your attorney may be able to satisfy the person’s needs in some other way.

D. Final Word: By Funding My Trust, Have I Created a Monster?

Many people worry that by funding a trust during life, they irrevocably are transferring their property or losing control over it. Nothing could be further from the truth. Your funded revocable trust is, after all, revocable. You retain absolute power to amend or revoke your trust and may move property in and out of the trust at any time. You continue as the ultimate owner of the property through the trust. You need not obtain from the IRS a separate taxpayer identification number for the trust. Your trust’s identification number is your Social Security number. This eliminates any need to file separate income tax returns for the trust. You report all items of trust income and capital gain on your Form 1040 as if you received it directly.

Of course, since you have complete access to the trust, a revocable trust will not insulate your assets from your creditors. Furthermore, the trust will not protect funds in the event of catastrophic occurrences, such as lawsuits or long-term nursing home care. And all assets in your revocable trust will be included in your estate for federal and state estate tax purposes.

Feel free to call us if you have any questions about funding your trust or if you need our assistance in doing so.