Funding the Trust: Retirement Accounts and Real Estate

by Sheryll Bonilla, Esq.

For a trust to work as a way to avoid probate, the trust has to be funded.  This means that assets (but not all) are placed into the trust.

For purposes of this discussion, the trust agreement is that long document that creates the trust. The short form trust/certificate of trust/declaration of trust (SFT/CT/DT) (different terms for the same document) is the shorter document that confirms the trust exists and identifies the trustees, successor trustees, and trustee powers.

Consult with your tax advisor or the account administrator
Not all assets should be put into the trust for tax reasons. There are severe penalties involved with “anything relating to retirement” – retirement accounts, annuities, etc. – naming the trust as a beneficiary.

Talk with your account administrator and/or tax advisor, who can inform you of the pros and cons. She or he may advise you to keep these outside of the trust. You can designate beneficiaries on those accounts to pass these assets to your beneficiaries.

Real estate
Make sure you put your real estate into your trust, including all that you own now and all that you acquire in the future. The biggest probate avoidance deals with real estate.

Instruct the escrow officer on how you will take the title. Give her a copy of your SFT/CT/DT so that the conveyance document can be prepared to convey the real estate in the correct legal name.

If the name on the deed does not match the name of the trust, there could be complications later. For example, “the 1986 John Doe Trust” is NOT the same as the “the John Doe Trust dated 1986”. These are two different trust names, even though they are similar.

Putting your real estate in a name that is not an exact match may require fixing in the future before you or a successor trustee can manage, convey, or sell or deal with the property.

Real estate includes leases on property you don’t own. Place leased property in the trust, too.

For example, if you lease farmland, warehouse, office space, and so forth, on a long-term basis, placing this in the trust permits your successor trust to take over the property after you pass.

Leaving it out of the trust and dying with the lease in your name as an individual can result in your heirs or successor trustee going to probate court to be appointed as personal representatives for authority to deal with the lease.

If you refinance your home loan, some lenders require that you take your property out of the trust before they put their mortgage on it. If this happens, be sure that right after the mortgage is recorded, you convey the house back into the trust.

The best way to do this is to ask the attorney who prepares the conveyance document that takes the property out of the trust to prepare at the same time, a second conveyance document that puts the property back into the trust.

You will sign and record this second document after the mortgage is put in place. Immediately after the mortgage is completed, record the second conveyance document to put the house in the trust.

Out-of-state real estate
A crucial category of assets that you should immediately transfer into your trust is real estate that you own in other states. If these are not placed into the trust, your heirs will have to open probate in each state where the real property is located.

They have to find a lawyer who practices in the jurisdiction and also in the proper court for probate where your property is. This ancillary probate requires hiring attorneys in those other states and will take time and cost money.

To avoid the delay and expense of probate in another state, after you create your trust, hire an attorney in that other state to prepare a deed conveying your property into your trust.

You must record the deed in the proper recording office for the real estate to be put into your trust. This is much cheaper and faster for your heirs and will save your heirs a lot of money and stress.

Your Hawaii lawyer cannot prepare these deeds for you; all lawyers’ permission to practice stops at the state borders (unless they also have a license in that other state).

You have to find a lawyer in the state where your property is. You might have to find a lawyer in that particular county since on the mainland, recordings are done by counties, unlike Hawaii which has a single Bureau of Conveyance for the whole state. This includes timeshares, leases, mineral rights, and other real property interests.

Hawaii real estate
Putting your real property into your trust requires a conveyance document – a deed, assignment of lease, etc. Simply writing on a schedule “my house at (address)” does not put the house into the trust.

This conveyance document must be recorded/filed in the Bureau of Conveyances.  Hawaii does not charge a conveyance tax for transferring your property into your trust. The deed must be accompanied by the P64B (green) form that informs the county tax office of the transfer.

If you are buying a house, give a copy of the short form trust/certificate of trust/declaration of trust (whatever yours is called) to the realtor or escrow officer.

They will pass it on to the lawyer writing the conveyance document so that the house you buy is transferred into your trust.

If you are refinancing, the lender will want to see your trust agreement to make sure that they can foreclose on the home if you don’t make your payments.

This article is for general informational purposes only. Please consult your lawyer for information that pertains to your particular situation.