Funding Your Colorado Revocable Trust, Part 1
There is an old saying that the devil is in the details. The details for an estate plan are funding your revocable trust. It is also the biggest complaint we get from our financial planning friends – we lawyers draft the document and don’t fund the trust. The decision to pay the lawyers to fund the trust is the client’s decision. We offer funding services. For those who go it alone, here are some general tips.
Let the lawyers transfer the real estate to your trust. Real estate can be tricky. Real estate located outside of Colorado must be transferred by a lawyer in that other state or country. Real property law varies greatly from one jurisdiction to the next as does how to hold the real estate (LLC, trust, fideicomiso, etc.). When buying property in another state or country, consider spending a few dollars with your local estate planning lawyer and probably a few more dollars with a lawyer in that foreign jurisdiction. It could save you a bundle, later.
Your Colorado revocable trust does not control property with beneficiary designations or property held in joint tenancy. This is a common misunderstanding. Consider syncing up your beneficiary designations and joint tenancies with your stated estate planning goals.
Lawyers and CPAs differ on this next one. We do not make our typical revocable trust the beneficiary of retirement accounts. We prefer to make individuals the designated beneficiary because it is easier to understand and avoids potential income tax recognition events upon death. If a trust is the beneficiary, we currently recommend a stand-alone trust specifically designed to be the designated beneficiary of a retirement account. It gets complex, fast, because of income tax deferral issues and the definition of trust income versus taxable income. Taxable income is not always the same as trust income.
Transferring LLC interests to a trust is easier if there is an operating agreement. Many people hold rental property in LLCs for liability reasons. Often, the bare bones LLC document is filed with the Colorado Secretary of State without a lawyer. There is no operating agreement. It is hard to document the transfer of an LLC interest to a trust without an operating agreement. There is no paper trail. The same is true for S-Corps and C-Corps without meeting minutes and issued stock certificates. A basic operating agreement is not that expensive and helps, significantly.
Some property cannot be transferred out of the individual’s name. Certain stock options, closely held company interests, and other property have restrictions on transfer. The transfer can be void or can trigger contractual rights of others. Always check the written documents before transferring any property interest.
Utilize your financial advisor to transfer mutual funds and brokerage accounts to your revocable trust. We work in conjunction with financial advisors because they will typically do the work for free. A little bit of lawyer time can be leveraged with a quality financial advisor.
More next month.
