FUNDING AND ADMINISTERING
by E. Steven Lauer, Esq.
Now that you have decided to create a living trust, it is important for you to obtain some guidance in the funding and the administering of the trust. The probate avoidance, asset protection and cost reduction features of a living trust can only be accomplished if you fund the living trust during your lifetime, administer the trust property, and keep meticulous trust records. The purpose of this article is to give you some guidance regarding these matters.
I.
Funding Your Living Trust
Funding your living trust means transferring the ownership of assets, such as real estate and intangible personal property, and the beneficiary of assets, such as life insurance and retirement plans, to your trustee. After the title to these assets is transferred, the assets should be listed on Schedule "A" of your trust agreement. Likewise, as assets are sold, they should be eliminated from Schedule "A" of your trust agreement.
Since funding your living trust is a very time-consuming process, the fees which we have quoted to you do not include these services. Generally, our clients take on the responsibility of funding their trusts. If you need assistance, we will be happy to assist you and will charge for our services on an hourly basis.
1.
Real Estate
The transfer of real estate to your trust is a legal function which a lawyer should perform for you. Generally, the transfer requires the preparation and recording of a deed to the trustee. The grantor of the deed is you, the current owner of the property. The grantee or new owner is "__________ as trustee under Agreement dated __________" where the first blank is the name of the trustee and the second blank is the date that the trust was executed.
The deed will contain a "full powers" clause so that the trustee may sell, lease, and otherwise deal with the property without having to record the trust document. A successor trustee can be named in the trust document to avoid having to record the Trust upon the death, disability, or resignation of the current trustee.
If the homestead real estate is being transferred to the name of the trustee and you are planning to continue to reside in the property, you are eligible for homestead exemption. You must re-apply for this exemption between January 1st and February 28th of the year after the transfer is made to the trust. The property appraiser's office will require a copy of your Declaration of Trust which shows that you have reserved the right to reside in the homestead real estate for the remainder of your life.
2.
Stocks,
Bonds, Bank Accounts and Other Intangible
Personal
Property
If your intangible personal property is held in brokerage accounts, you must provide your broker with a letter of instruction requesting that the assets in the brokerage account be transferred to the name of "__________ as trustee under Agreement dated _______" where the first blank is the name of the trustee and the second blank is the date the trust was executed. The broker will require a photocopy of the Declaration of Trust. If the trust is self-administered (i.e., if you are acting as your own trustee), you will use your social security number as the tax identification number for the trust. If someone other than you is acting as the trustee or if you are acting as co-trustee with someone else, you must apply for a federal identification number. The procedure for applying for this number is explained later in this article.
As for your bank accounts, the banks will generally require the same information as the broker. Be careful to inquire whether your certificates of deposit can be transferred without an early withdrawal penalty. Most banks and other financial institutions require an early withdrawal penalty to be paid except on the death of the account holder. Therefore, you may want to wait until your C.D.s mature to transfer them to the trust.
The most difficult assets to re-register are the stocks and bonds for which you hold the original certificates. These certificates must be forwarded to the transfer agent for re-registration. Normally, the transfer agent will require a copy of the Declaration of Trust, a letter of instruction, an Affidavit of Domicile, and an assignment separate from certificate. You may obtain the name of the transfer agent from your local banker or broker. In the alternative, you may pay a brokerage house a small fee for transferring the name on these assets for you. In most cases, the fee will be money well spent, especially when you consider the out-of-pocket costs, such as registered mail and photocopying expenses, and the time involved in re-registering the assets yourself.
3.
Life Insurance Beneficiary Designation
Under some circumstances, I will recommend that the beneficiary of a life insurance policy be changed to the trustee of your living trust agreement. In such cases, you must do the following:
First of all, you must request a change of beneficiary designation form from the insurance company. Once you have received this form, you should name the primary beneficiary of your insurance policy as "The Trustee of the _________ Revocable Living Trust Agreement dated ________" where the first blank is your name and the second blank is the date which you signed the trust agreement. We would also recommend that you request a confirmation of this change of beneficiary from the insurance company so that a clerical error by the insurance company will not prevent the benefits from passing to the intended beneficiary.
4.
Retirement Plan Benefits
Under normal circumstances, we recommend that an individual survived by a spouse name the spouse as the beneficiary of retirement plan benefits. The spouse has greater flexibility and options regarding the taxation of these benefits than would a trustee. Trusts which do not have a “designated beneficiary” are required to recognize income tax on the distribution of the plan benefits within five years after the death of a former employee. Trust which have a designated beneficiary may take distributions over the life expectancy of the designated beneficiary. On the other hand, the surviving spouse can roll over the plan benefits to their own IRA and delay taxation on these plan benefits until the year after age 70‑1/2 years just as the former employee.
If we have determined that it is necessary or advisable to name the trustee as the primary or secondary beneficiary, the same procedure outlined above relating to life insurance should be used to redesignate your beneficiary. If a Trust is named, we will assist you in preparing the beneficiary designation. The administrator of your retirement plan should have the necessary change of beneficiary designation forms. Once again, you should request confirmation of this change of beneficiary to assure that the plan records have been properly changed.
II.
Administration of Your Living Trust
1.
Identification Number
If you are the sole trustee of a trust created for your own benefit, you need not apply for a new tax identification number. Instead, you should use your social security number wherever required.
On the other hand, if you are co-trustee with another individual or if you have named another individual or instruction as your trustee, you must apply for a separate federal identification number. A Form SS4, which we would be happy to provide to you, should be used to apply for this number. This number should be used on all trust records. If you have named a corporate trustee, the corporate trustee will normally apply for this number.
2.
Tax Returns
If you are the trustee of a trust which you created, you are not required to file a separate income tax return or intangible tax return for the trust assets. Instead, you record these assets on your Individual Income Tax Return, Form 1040, or Individual Florida Intangible Tax Return, as if the trust did not exist.
On the other hand, if you are co-trustee with another individual other than your spouse or if you have named a corporate fiduciary to be the trustee of your trust, the trustee must prepare a Fiduciary Income Tax Return, Form 1041, and file a separate Florida Intangible Tax Return each year. This income tax return is due on April 15th of each year, just as your income tax return is due. We would be happy to prepare the fiduciary income tax return for your trust. If you have named a corporate trustee, the corporate trustee may prepare this return for the trust at a nominal fee.
3.
Trust Records
One of the primary reasons for creating a living trust is the cost savings associated with avoiding probate. If proper trust records are not maintained, however, it may be as expensive if not more expensive, to administer a living trust after death as it is to probate your estate.
First, you must keep an accurate list of all assets which are currently in the trustee's name which you should update each time an asset is purchased, sold, or transferred. With this information should be the acquisition date of the asset and its tax cost basis.
Next, an accurate and complete record of all income received by and deductions paid by the trust should be maintained each year. Most individuals find it more convenient to open a separate checking account to which trust income can be deposited and checks for trust-related expenses can be paid. These records should be maintained for a minimum of four years. Tax returns should be maintained forever. Likewise, information such as relating to the tax basis of trust assets should be retained for three years after the asset is sold.
4.
Fiduciary Responsibility
If you are the trustee of your own revocable trust, you may manage the trust assets without any worry of fiduciary responsibility. On the other hand, if you are acting as a trustee of an irrevocable trust or if you are a trustee of a trust with beneficiaries either current or contingent other than yourself, you have a fiduciary responsibility to these other beneficiaries.
Although the Trust document itself determines the distribution of net income and principal, gives the Trustee a number of “powers”, and provides definitions to help interpret the Trust documents, there are a number of other duties and responsibilities imposed by Florida law and the Courts regarding the administration of trusts in Florida. In fact, the 2002 Legislature in Florida believed that these duties and responsibilities were so important that trusts executed after January 1, 2003 must contain a notice that states:
“The trustee of a trust may have
duties and responsibilities in addition to those described in the instrument
creating the trust. If you have
questions, you should obtain legal advice.”
Although it would be impossible to provide an exhaustive description of all of the powers and duties and liabilities as trustee, the following outlines some of the more important issues:
You have a statutory duty under Florida Statutes, sec. 737.303, to keep the
beneficiaries of the trust reasonably informed of the trust and its
administration. Specifically
mentioned in the statute is the duty to inform the beneficiaries in writing of
your acceptance of trusteeship and your full name and address within 30 days
after acceptance. Upon reasonable
request, you must provide a beneficiary with a complete copy of the trust
instrument including amendments. In addition, you must provide a beneficiary with relevant
information about the assets of the trust in particulars relating to
administration upon reasonable request.
After January 1 2003, the trustee is
required to send a “trust
accountings as set forth in 737.3035” to the beneficiaries of the trust each
year. The trust accounting must be
a reasonably understandable report from the date of the last accounting or the
date upon which the trust became accountable.
It must begin with a statement identifying the trust, the trustee
furnishing the accounting, and the time period covered by the accounting.
The accounting must show all cash and property transactions and all
significant transactions affecting the administration during the accounting
period, including compensation paid to the trustee and the trustee’s agents.
Gains and losses realized during the accounting period, and all receipts
and disbursements must be shown. The
accounting must, to the extent feasible, identify and value trust assets on hand
at the close of the accounting period. For
each asset or class of assets reasonably capable of valuation, the accounting
shall contain two values: the asset acquisition value or carrying value, and the
estimated current value. The
accounting must identify each known non-contingent liability with an estimated
current amount of the liability shown. To the extent feasible, the accounting must show significant
transactions that do the affect the amount for which the trustee is accountable,
including name changes and investment holdings, adjustments to accounting
values, a change of custodial instructions, and stock splits.
The accounting must reflect the allocation of receipts, disbursements,
accruals or allowances between income and principal when the allocation affects
the interest of any beneficiary of the trust.
In addition, beneficiaries who
receive “trust disclosure documents” after January 1, 2003 are limited to
six months after receipt of the trust disclosure document to bring an action
against the trustee for breach of trust based on any matter adequately disclosed
in a trust disclosure documents. The
limitation notice may, but is not required to be in the following form:
“An action for breach of trust
based on matters disclosed in a trust accounting or other written report of the
trustee may be subject to a six-month statute of limitations from receipt of the
trust accounting or other written report. If
you have any questions, please consult your attorney.”
The limitation notice can be
enclosed in the trust disclosure document or delivered separately within ten
days after delivery of the trust disclosure document.
In addition to statutory duties, the
case law in Florida imposes duties on a trustee.
A trustee is a “fiduciary.” A
fiduciary is a person who is entrusted with another’s property. Your duty as a fiduciary is to act for the benefit of another
person as to matters within the scope of the relationship between them.
A trust creates a fiduciary relationship with respect to the trust
assets, subjecting the trustee to equitable duties to deal with the property for
the benefit of another person.
Generally, the law requires a
trustee to act in good faith, to perform selflessly, and to not abuse or take
advantage of their position and the trust that has been placed in them. You are not required to accept your position as trustee.
For that reason, you are required to “officially” accept the position
of trustee in writing and to send notice to the beneficiaries that you have
accepted your duties and responsibility.
In the administration of a trust,
you have the duty to exercise care, diligence, and prudence in administering the
assets of the trust and in dealing with the trust beneficiaries.
This is called the “Prudent Person Rule” and it governs all your
duties as trustee.
One of the most fundamental duties
of a trustee is loyalty. The
trustee may not assume a position that is antagonistic to the beneficiaries of
the trust. The Florida Statutes
contain a specific provision concerning conflicts that otherwise would violate
the duty of loyalty. Under Florida
Statutes, sec. 737.403(2), if the duty of the trustee and the trustee’s
individual interests, or its interests as a trustee of another trust, conflict
in the exercise of a trust power, the power may be exercised only by court
authorization. This duty of loyalty
becomes especially important when an individual is both a beneficiary and a
trustee. You need to be especially
concerned about balancing your interests, as a beneficiary of the trust, and the
interests of the remaindermen. This
duty is especially important in deciding on the investments, which will be
discussed later, and on making discretionary principal distributions.
The trustee also has the duty not to delegate their responsibility to
another for the entire administration of the trust.
One of your most important duties as
a trustee involves investment of the trust assets.
Florida has a “Prudent Investor Act”, namely Florida Statutes, secs.
518.11 and 518.112. In the Prudent
Investor Act, Florida has adopted the “portfolio” theory of investments.
In the portfolio theory of investments, the performance of a trustee is
not determined by the individual investments made by the trustee, but by the
performance of the entire portfolio. Under
the portfolio theory, no investment is viewed in isolation so that an investor
who fails in one or more single investments will likely not be held liable.
In making investment decisions, many
professional corporate trustees use the “investment committee” approach.
This approach requires the establishment of written policies and
procedures to ensure that the trustee complies with applicable law.
The Prudent Investor Act provides
that you have a duty to diversify the investments in the portfolio unless, under
the circumstances, you believe it is in the best interests of the beneficiaries
and furthers the purpose of the trust not to diversify. You also have a duty within a reasonable time after
acceptance of trusteeship to review the investment portfolio and to make and
implement decisions concerning the retention and disposition of original
pre-existing investments in order to conform to the Prudent Investor Rule.
These decisions may be influenced by the assets’ special relationship
or value to the purpose of the trust or to some or all the beneficiaries
consistent with your duty of impartiality.
You have a duty to pursue an investment strategy that considers both the
reasonable production of income and safety of capital consistent with your duty
of impartiality and the purposes of the trust.
The circumstances that you may consider in making investment decisions
include the general economic conditions, the possibility of inflation, the
expected tax consequences of investment decisions or strategies, the role each
investment or course of action plays within the overall portfolio, the expected
total return, including both income yield and appreciation of capital, and the
duty to incur only reasonable and appropriate expenses.
Florida Statutes, sec. 518.112, allows you to delegate any part or all of the investment function to an investment agent if you exercise reasonable care and judgment and caution in selecting the agent. If you decide to delegate investment responsibility, you have to give written notice of your intention to begin delegating investment function to all beneficiaries eligible to receive distributions from the trust within 30 days of the delegation.
III.
Conclusion
By creating a living trust, you have utilized a powerful vehicle through which your assets can be protected and distributed with a minimum of cost and inconvenience during your lifetime and after your death. The above information regarding your living trust outlines some of the requirements of funding and administering your trusts. The information provided in this article is intended to be general. Consequently, some of the information may not apply to you. If you have any particular questions or concerns, please do not hesitate to contact me.
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Prepared 1989;
revised Oct. 1991, July 1992, Nov. 1994 (retyped Dec.1997) , Sept. 1998, revised
March 2003Reproduction or
other use of this Article without the
express written
consent of E. Steven Lauer, Esquire, is expressly
prohibited.
All rights reserved. |