You may have established a revocable trust for a variety of reasons – to maximize the use of both spouse’s estate tax exemption equivalents; to facilitate the management of assets during lifetime, particularly during any period of incapacity; and to avoid the necessity of probate. Following up to actually re-title assets to the trust(s) and monitor the titling of assets, consistent with your particular estate plan, is a necessary and important part of this process.
Presently, the estate tax exemption equivalent is $2,000,000 and is scheduled to increase to $3,500,000 in 2009. Absent further legislation, the estate tax will be repealed in 2010, and it will then reappear in 2011 with only a $1,000,000 estate tax exemption equivalent (indexed for inflation). While we expect Congress to revisit the estate tax before 2010, we do not know what future legislation will provide. However, at this point, it does appear likely that the estate tax will remain in place. If you are married, then at this time, fully utilizing both spouses’ estate tax exemption equivalents can provide substantial estate tax savings to future generations. Failure to properly divide assets between spouses and fund each of your respective revocable trusts with sufficient assets to fully utilize each spouse’s estate tax exemption equivalent trust (often called a “Residuary Trust Share” or possibly a “Disclaimer Trust”) can waste the exemption of the first spouse to die, which may increase estate tax to be paid upon the surviving spouse’s death.
Bear in mind that funding trusts is not “one size fits all” and needs to be carefully tailored to each client’s unique situation. Certain assets should not be transferred to a revocable trust. These assets generally include individual retirement accounts, annuities, and in some circumstances, homestead property.
There may be income tax basis considerations to dividing assets to fund each spouse’s estate tax equivalent exemption. Most assets will receive a new income tax basis upon death, measured by the fair market value of the asset at the time of death. Therefore, it may be appropriate for both spouses to hold some low basis assets so that, regardless of the order of death, the assets will receive a new fair market value basis.
If your spouse is not a U.S. citizen, then you should be aware that special restrictive tax rules apply to transfers between you or divisions of jointly-held property. The marital gift and estate tax deductions will not apply automatically to non-citizen spouses, absent treaty provisions or careful estate planning.
When you are ready to fund your trust, you can easily re-title marketable securities, certificates of deposit, and other such assets to a revocable trust by notifying your bank or brokerage company your intentions. You will need to provide the official name of the trust, certain relevant pages from the trust to establish the date of the trust and powers of the trustee to manage the trust assets, as well as signature pages. The official name of a trust is usually Mary Client, Trustee U/A dated January 1, 2007 f/b/o Mary Client, et al.” We normally include a trust funding memorandum with any new revocable trust, in order to facilitate this process.
If real estate is to be transferred to the trust, then a deed must be prepared. Property owned out of the state of Florida will need to be prepared by an attorney from that state. If real estate is encumbered by a mortgage, you will need to obtain the consent of the lender prior to the transfer. The transfer of unencumbered property between spouses normally will not require the payment of documentary stamp taxes. However, if encumbered property will be transferred from one spouse to another, then documentary stamp taxes may be due.
Closely-held business interests can be assigned to your trust by using stock powers and new stock certificates for interests in corporations; and by executing assignments of interests in partnerships or limited liability companies. As noted above, certain restrictions may apply to your ability to transfer such interests, requiring other owners to consent.
A revocable trust is generally ignored for federal income tax purposes. Therefore, you will continue to use your own social security number for any account or asset re-titled to your trust and you will report any income generated by the trust assets on your individual income tax return. Further, once you have funded your trust, you will not need to re-title the assets should you choose to amend the trust at a later date.
Funding revocable trusts can be very straightforward or more challenging, depending upon the assets to be transferred, whether the client is married, and other such circumstances. You must continue to carefully monitor and consider your trust funding, as well as your overall estate plan over time, to assure that it continues to be appropriate given changes in assets and family circumstances. We are always glad for you to call upon us if we can assist in any way.