A critical objective of any estate plan is funding your Revocable Trust to avoid probate. Funding Revocable Trusts I and II discussed the importance of doing so. But transferring assets into a Trust during your lifetime begs the following questions: What am I giving up? Am I losing control? Am I adding complexity and compliance issues? The answer to all these questions is you are giving up nothing with no loss of control and virtually no complication. Here is why:
1) Control and Enjoyment: When you create your Revocable Trust you are the “grantor” or “settlor.” You control the Revocable Trust as the “trustee.” And you are the only “beneficiary,” meaning during your lifetime you continue to spend and transfer the assets the same as if they were not in the Revocable Trust. Of course, there may be exceptions to these general rules to deal with life changes. For example, you may be a co-trustee with your spouse for convenience. Or there may be a named trustee to take over if you are incapacitated. But on balance, the Revocable Trust creates no complication during your lifetime. (An exception may be if your house is in your Trust and has a loan, but even then the lender cannot prohibit the transfer.)
2) Compliance: There is no compliance, in that the Revocable Trust does not exist for income tax return purposes. The Revocable Trust uses your social security number and income or loss is reported on your 1040. Your CPA does not need to know about the Revocable Trust.
Even though the Revocable Trust is a non-entity for income tax purposes, to transfer assets into the Revocable Trust you need to change beneficiary designations or title as described in the Revocable Trusts I and II posts. Once done, there are no further updates. It is important to contrast the Revocable Living Trust described here as a Will substitute and used for probate avoidance, from an Irrevocable Trust, that would typically have a separate tax ID number and would have restrictions on use and control. These discussions are not relevant to an Irrevocable Trust, which serves other purposes.
To transfer assets to the Revocable Trust, either as a beneficiary upon death or by title during lifetime, you will be asked the following: The name of the Trust, the name of the Trustees, and the date. (As stated, if asked for a Trust ID number, the number is your social security number.) For example, the information to put on a beneficiary designation form, or a bank account, or a deed, would be the following:
“John Smith Revocable Living Trust, John Smith Trustee, created under agreement 1/1/18.”
More information on funding your Revocable Trust will be in the next post, Funding Revocable Trusts – Part IV