Ep. 22: 7 Key Trust Assets and How to Effectively Fund Them Into Your Trust

Hello everyone, my name is Attorney Ted Gudorf. Welcome to the repair the roof podcast. This name comes from President Kennedy’s famous quote, “the time to repair the roof is when the sun is shining.” In this show, we help individuals and families learn more about all things estate planning and elder law. This is episode 22 – Funding trusts – The top seven items.

My mentor told me many years ago, that the key to an effective estate plan is funding of the trust. Oftentimes, we spend countless hours assembling all of our information with respect to putting together our trust. We go over our questionnaire, we identify what we own. We spend hours figuring out who should get what, when, and how. We sign the document after a thorough review and sometimes it seems like we want to just stop at that point because we are exhausted. Yet, the most important thing remains to be done, and that is transferring what you own into the trust. The key to an effective estate plan is fully funding the trust with everything that you own. Under the law, there is only one item that we cannot put into the trust, and that is your retirement account. It does not matter whether that is a IRA, traditional or Roth or inherited, it cannot go in the trust, a 401(k), a 403(b), a 457 Deferred Comp. Those items are controlled by a beneficiary designation. Oftentimes, the beneficiary of those retirement accounts is going to be a standalone retirement trust.

Today, we want to talk about the top seven things that every person owns, that we want to put into the trust and how are we going to do that. The first item we almost all own is some form of real estate. Whether this is your home, your primary residence, or your vacation home, or if it is rental real estate, regardless of whether it is a timeshare, we want to make sure that all of your interest in real estate, whether you own 100% or a partial interest are transferred into your trust and it does not matter whether you have a revocable or an irrevocable trust, we want to make sure that you identify which trust is going to own the real estate, or whether for instance, if it is rental real estate, whether you are first going to transfer it into a limited liability company, and then transfer the limited liability company into the trust. We need to know that the way we transfer real estate is by a general warranty deed. As a general rule, we do not want to use a quitclaim deed. The reason we do not want to use a quitclaim deed is that if you had title insurance, and you transfer it to the trust with a quitclaim deed, you will void the title insurance. Furthermore, you want to make sure that the warranties remain when you transferred into the trust. So as a general rule, we are going to have a general warranty deed prepared by a lawyer who will have the legal description preapproved by the county engineer’s office prior to the recording of the deed. So the process that we have to go through is to create a deed. How do we create a deed? We look for in the public record the prior deed, and the prior deed will tell us how you took title to the property. Did it include your full legal name? Did it include a middle initial, where’s your middle name spelled out? Was it spelled correctly? Did you take title before you got married and now you have a married name and so we have to add both names. Secondarily, was the legal description properly placed on the deed? We want to make sure that that is done. Now, generally speaking, we are not going to do a whole title exam to determine if there are any liens that would cost an additional sum of money and more often than not, not be worth the effort. Having said that, we want to make sure that if we have a mortgage on the property, that we are okay to transfer it into the trust, whether it be revocable or irrevocable, whether we are okay to transfer it into a limited liability company, without triggering any due on sale clause. As a practical matter, the mortgage companies do not have a mechanism by which to track who owns what, while they have a pending mortgage. So for the most part, we have become over the years less concerned about the due on sale provision than what we were, say 2025 years ago. So again, in the State of Ohio, we are going to transfer real estate, either into a revocable trust, an irrevocable trust, or a limited liability company.

Now, as a general rule, a primary residence should not be transferred into a limited liability company because if you were eligible for the homestead exemption, it will avoid that. Furthermore, some insurance companies may require you to have a commercial insurance policy rather than a residential policy if it is owned by a limited liability company and by the way, some insurance companies simply will not write commercial policies, therefore, you would have to switch insurance companies if it went into a limited liability company. Now, under Ohio law, if the property is in your name, and you are married, your spouse needs to release dower to allow you to transfer it into the trust because if it is owned by a trust, there are no dower rights. If it is owned by limited liability company, there are no dower rights. On the other hand, if it is in your individual name, there are dower rights and you cannot transfer that property without your spouse’s signature. So to put it into the trust, we are going to ask your spouse to waive dower rights if the property is in your sole name. Now on the other hand, if they are a joint owner, that is not a problem, because they are going to have to sign anyway, because they have a happy interest. So general rule is, we want all real estate to be transferred into the trust or limited liability company by general warranty deed. Under Ohio law, we want to make sure that the spouse waives all dower rights. We want to make sure that the new deed tracts the exact name that was on the prior deed. Furthermore, we want to review and have preapproved the legal description that was on the prior deed to make sure that it is still acceptable to the county, and that it was properly placed on the prior deed because if there were mistakes made, we want to fix them at this point along the way. Real Property is some of our largest assets and we want to make sure that we do it correctly. At my firm, we always sign the deed transferring the property into the trust on the date we sign the trust. That is our standard rule. There are a few exceptions for people who have multiple parcels, but as a general rule, we want to do it on day one.

Okay, item number two, tangible personal property that does not have a title. That is your stuff. It might be your household furnishings, your personal clothing. It might be all your recreational items. It might be heirlooms, it might be antiques, it might be your jewelry. As a general rule, we want to sign an assignment of tangible personal property. Transferring everything we own at the time we create the trust into the trust. Now it is oftentimes helpful to not only assign it into the trust and sign that piece of paper, but oftentimes, it is also helpful. If at the same time we create a personal property memorandum, indicating who we want to get that tangible personal property. That is a conversation for another day, but for purposes of funding our trust, making sure that we have an assignment of tangible personal property, whereby we transfer everything that we own, without exception into the trust, so that it does not have to go through the probate process or are tangible personal property, that can all be done by a straightforward assignment of tangible personal property.

Item number three, let’s talk about our vehicles. There is a lot of misinformation out here with respect to whether we should or should not fund our titles of our vehicles into the trust. I am going to tell you that I am a big believer in fully funding our trust, and that includes all of our vehicles. Now, it does not matter whether the vehicle cannot be run, or whether it is a Lamborghini. In my view, all vehicles should be retitled into the name of the trust. Why is that? Well, it is true that if we are a married couple at the first death, a number of vehicles can be transferred by affidavit with a death certificate at the first death, but that does not apply at the second death. So the easier way to go about this is to transfer the title and registration to the trust. As a general rule, it is our recommendation that your vehicles go into your revocable trust. Now, there are exceptions to this. For instance, if we have a limited liability company, or our farm, and we want to place our pickup truck in the name of the operating company, we can do that. Some of my clients will take titled farm assets and put it in their holding company, or sometimes they will form a separate LLC, there is no one way to do it in a farm operation or a business operation, but we should talk that through. But for the bulk of our clients who do not have a business or a farm, we are going to take the vehicles, whether that be a car, or whether that be a motorcycle, whether that be a boat, or a trailer, we are going to transfer those by going to the clerk of courts title office, and getting a new title registered in the name of our trust, so that we can fully fund the trust with all of our vehicles. Because you see, if we do not transfer the title, then we are going to have to probate those assets more likely than not and we are trying to avoid that probate process in the event of incapacity or death. Now after we go to the clerk of courts, and change the title, we should go next door for those who have one-stop shopping to the License Bureau and change the registration. So we want to change both the title and the registration to the trust, more often than not, we want that to go into the revocable trust.

The next item we want to talk about is we want to talk about our bank accounts. Whether this be our checking account, our savings account, money market account, certificates of deposit, those are the items that we deal with, with our bank. Now, the easiest way to retitle assets into your revocable or irrevocable trust, is to take the certification of trust with you when you are retitling any of these assets. Sometimes the bank will ask to see a copy of the trust. Not sure why? Does not really mean a whole lot because obviously you can make changes to the trust the day after you go to the bank, but some banks have a legal counsel that requires the bank to at least look at the trust, if not get a copy of the trust. Our preference is for you not to give them a copy of the trust, but to give them a certification of trust number one. Number two, as a general rule, we are going to focus in on putting our bank accounts in the name of our revocable trust. Now, oftentimes, we are going to ask you if you have an irrevocable trust, to open up a new checking account in the name of the irrevocable trust and if you created a limited liability company, sometimes we are going to ask you to open up a new checking account in the name of that limited liability company, but keeping it simple here today, if you have a revocable living trust, we want you to go to each bank where you have a checking account, a savings account, a certificate of deposit or a money market account, we want you to go there, schedule an appointment, meet with them, and have them retitle your existing account into the name of your trust. You do not want to open up a new account, unless they absolutely insist. What is your backup? Yesterday I had a client call me on the phone. He has his banking at a small rural bank in Mercer County, Ohio. He was at the bank, he put the manager of the bank on the phone to tell me that their bank policy would not allow him to take his existing checking account and transfer it into his revocable trust. My client was frustrated over that, because that existing account had a lot of payments that were being taken out of it to pay certain bills. In addition, that account had auto deposit for his social security. So he had a choice to make, he could either go to a different bank that would allow him to put his checking account in the name of his trust or he could do what he ended up doing in this instance, the bank recommended that he not retitle the account directly into the name of the trust, but to do the next best thing, which is to make it transfer on death into the trust. So what my client ultimately decided to do for purposes of the moment was to take the existing account that had the auto withdrawals and the auto deposits, and temporarily make it transfer on death to the revocable trust. Then at the same time, he opened up a new checking account in the name of the trust and over the course of the next three to six months, he will begin changing over the auto deposits, and the auto withdrawals to the new account opened up in the name of the trust and that seemed to be a satisfactory work around the bank’s policy of not allowing him to take an existing account and transfer it directly into the trust. It is very important though, that we make sure that we get all of our accounts titled one way or the other into the name of the trust. Worst case scenario, we can do a transfer on death. There should not be any problems with respect to transferring existing certificates of deposit. It should not trigger a termination of the CD, nor should it trigger any penalty. After all, the revocable trust and 90% of our irrevocable trust, utilize the trust makers social security number and most banks, almost every single bank will allow a CD that is under a person’s social security number to be transferred into that person’s revocable trust or irrevocable trust without any problem. So it is very important that we get all of our bank accounts transferred into the trust soon after we create the revocable or irrevocable trust.

Next, after we do our bank accounts, the next item we want to focus in on our investment accounts. What do I mean by our investment accounts? Well, really what I mean is all of our investments. Now, I want to talk about them as a group. I want to talk about stocks, bonds, mutual funds, annuities, any kind of investment account that we hold, it is very important that we understand the basic fundamental rules. Again, number one, we believe in fully funding our trust, every investment, every account, where ever it is, whether it is at a brokerage firm, whether it is at a transfer agent firm, whether it is at a local bank, where ever it is located, we have to go through each individual item and transfer it to the trust, more often than not, it is going to be a more complicated procedure than transferring our bank accounts. Why is that? Well, the reason is, is because when we transfer securities, and bonds, there is something called a medallion signature guarantee that the security firms are going to demand be placed on the documents, the transfer documents. So you physically have to appear in front of someone, typically, it is going to be at your bank and they will have one person at that branch that can do the medallion signature guarantee, what is that all about, you have to appear in front of that person and present to them personal identification information such that they are confident that you are who you say you are, they will then place the green stamp on the document indicating that you proved to them that you are who you say you are and then the bank will ensure to whoever the company is that is going to do the transfer, they will ensure that that is in fact the case. So this is true, whether it is a mutual fund, this is true, whether it is a stock certificate or a government bond, there are a few companies, typically annuity companies that do not require the medallion signature guarantee, they will simply require a change of ownership. Now remember, for those items that do have a beneficiary, you want to change both the owner and the beneficiary to your trust. Again, whether that is a revocable trust, or an irrevocable trust, you want to do the change of ownership, and the change of beneficiary and you should ask them to confirm with you in writing, that the change of ownership and the change of beneficiary were done. Get some piece of paper that indicates such and by the way, when you get your statements in the mail, or by email, check those statements to confirm that they are addressed to the trust, not to you individually. So as a rule, all investments, you want to change the owner and if there is a beneficiary, change the beneficiary to your trust, or those clients who have it in investment LLC. Why would you have an investment LLC? You would create an investment LLC to protect the investment from any type of lawsuit or other creditor claim. I am a big believer in creating investment LLCs to own our investments. I happen to have one myself, Gudorf Investments LLC, it contains my brokerage account. Why? In the event I am in a car accident, that brokerage account will be totally protected from creditors who may want to sue me. Having said that, when we go to retitle, if we are going to put it in the name of our revocable trust, that is fine. Put it in our irrevocable trust, that is fine. Put it in our Investments, LLC, that is fine, but we have to go through doing a change of ownership and more often than not, it is going to have to be stamped with a medallion signature guarantee. Now, one way that I have learned to kind of cut through getting the medallion signature guarantee at a bank is to schedule an appointment with the brokerage firm if they have a local office, there are those who have a local office, giving example, I have a client of mine who is a lawyer in Cincinnati, and he had an account with Fidelity. Good news is Fidelity has a local office at Kenwood, my client could go over to the Kenwood office, they would help him prepare the change of ownership form. They had the medallion signature person there who could stamp it, it was done within one hour. If your broker does not have a local office, then you will have to get the forms, you will have to schedule an appointment with your bank, with the person who can do the medallion signature guarantee. Word of caution, do not sign the document before you appear in front of the person who is going to do the medallion signature guarantee. That will not work, they have to first verify your identity and then they have to observe you sign the document. Getting your investments retitled is very important.

Let’s move on and talk about the next item that we want to transfer into the trust. So I just got done talking about an investment LLC, that is a form of a what we would call a, perhaps a business entity, a limited liability company. Many of you own limited liability companies, maybe you own your own business, maybe you own a farm. Maybe you own rental real estate. All rental real estate should be in the name of a limited liability company at a minimum, perhaps your vacation home should be in the name of a limited liability company. Certainly, all of your farm holdings should be in the name of one or more limited liability companies. The only piece that we do not want to put into our limited liability company is our home as a general rule. So if we have a business interest, and it is either a corporation, or a limited liability company, and oh, by the way, I probably have not created a corporation in well over 25 years. Yet, I probably create 200 Limited Liability Companies every single year. Creating a limited liability company is more difficult than what people realize, it is not just going to the Secretary of State’s website and registering the name. Once you register the name is when the work begins because you have to issue membership units, you have to sign an operating agreement, you have to make sure it does or does not include Buy Sell provisions within the operating agreement. So you have to adopt, in our view, we would adopt, have an organizational meeting added on minutes. So make sure when we establish a limited liability company, make sure it is properly formed, make sure we have the operating agreement, make sure we have membership certificates and we take minutes of our meetings. Setting that aside, if we are going to transfer it into our trust, make sure that the operating agreement, or if it is a corporation, make sure that the shareholders agreement allow us to transfer those interests into a trust and if they do not, we are going to have to get approval to do so from the other members or the other shareholders. Do not just transfer into the trust, thinking that that is going to be effective, because if the operating agreement prohibits that, then the transfer is subject to being called into question. So make sure we review the underlying documents, number one, number two, when we transfer the membership units or the stock into the trust, we are going to do that by assigning. So there will be assignment of our limited liability company membership units into the trust and again, we want to make sure that the underlying document allows it. We want to make sure we have minutes where all of the members authorize it to be transferred into the trust. Why do we want to have it transferred into the trust, again, that is how we are going to avoid probate on having to probate that business interest. Now if we happen to have an entity that is a business entity, and it happens to be taxed as a S corporation or a C corporation, we want to make sure that our trust document has expanded S corp provisions, because we do not want that trust to terminate the S corp upon your death and there are special provisions that can be placed into the trust whether revocable or irrevocable that allows the trust to be an S corp owner upon death and it allows the trustee to make certain elections after your death. Having said that, it is very important that we get these membership interests transferred into the trust sooner than later.

Let’s talk about life insurance. All too often my colleagues who sell life insurance tell their clients, “Oh, you do not need to put the life insurance in the name of the trust, it is going to avoid probate because there’s a beneficiary,” and they missed the whole point. More often than not, the assets that are owned by our trust during our lifetime, at death will go into sub trusts that we create for our spouse or our children and the sub trusts are protected from things like divorce, or lawsuits, or bankruptcies, or nursing homes, or upon death, will go to our grandchildren. Now, think about it, if our life insurance is not titled in the name of our trust, but passes by beneficiary outside the trust, it is not going to be protected in the hands of the beneficiary from these bad things that can happen. Again, divorce, lawsuits, creditors, bankruptcies, nursing homes, and upon death, more likely than not the funds will end up going to a spouse, a daughter-in-law, or a son-in-law. That is not what we want. So let’s make sure that our life insurance has both the owner change and the beneficiary change to our trust. That is really important, and is one of those things that I see missed all the time.

Well, hopefully today you found this session to be very informative. I hope that it will prove to be motivating for you to have a fully funded estate plan. Thanks for being with us today and until the next time, be well.

Until our next session, just remember the time to repair the roof is when the sun is shining. To get started with your estate plan, you can go to gudorflaw.com/gettingstarted. For a free copy of our recently published book called The Ohio Estate Planning Guide, go to gudorflaw.com/book.