We have been taught as attorneys to prepare and execute well-designed and effective estate planning documents for clients. But once the ink has dried, does the client have an estate plan that works for them? I respectfully submit that they do not. An estate plan does not properly work for the client until the client’s assets are re-titled (“funded”) so that they are aligned with the estate plan. Even beyond this stage, continuing to keep the legal documents updated and assets properly funded are essential to an effective estate plan. The scope of this article will review how to fund cash accounts to a client’s living trust. This article is the first of a series of “how tos” for funding various types of assets. This article, as well as future articles, will be based from a legal perspective as well as from a technical/ practical perspective.
Cash accounts include bank or credit union checking, savings, money market, and certificates of deposit accounts (UTMA and UGMA accounts are beyond the scope of this discussion). Certain requirements must be met when funding cash accounts. When funding or setting up an account in the name of a trust, a bank or credit union is entitled to know that a trust exists. The Affidavit of Trust accomplishes this by: stating that the trust is effective, providing the name of the trust, and stating who the trustees are. Attached to the Affidavit of Trust should be the trust’s title page, table of contents, Article One – “Establishing My Trust” – and the signature pages. Note that additional sections of the trust may also be needed if successor trustees are currently acting as trustees or if the trustmaker is incapacitated or deceased. We have found that although the Affidavit of Trust satisfies most banks and credit unions, some institutions (because of internal policies) will require a full copy of the trust instrument. In such cases, if the client does not want to provide the institution with a copy of the full trust instrument, the client may need to move his or her account to an institution that doesn’t require the full trust instrument. Further, the institution will generally require that all trustees sign the signature card for the account. As to signatures required for any day-to-day handling of the account (e.g. check writing), most institutions will require that all trustees sign unless the trust instrument provides otherwise (our normal trust language is to provide that only one signature is necessary – unless otherwise needed or desired by the client). Finally, because of the Patriot Act, institutions may require that the client show more than one form of identification (we often find that the institution wants to see two forms of identification) prior to doing anything with an account.
When funding current checking, money market and savings accounts to a revocable living trust, it is very important to ascertain whether any direct deposits or withdrawals are set up for the account. If there are, and in order to keep this account open, it will be important to keep that account aligned with the primary account holder so that the social security number on the account doesn’t have to change. If the account number changes, it may be difficult for the client to realign the direct deposits and/or withdrawals with the new account — unless the institution offers electronic transaction transfer services to make sure that these deposits and withdrawals are transferred to the new account. We find that the easiest approach in funding existing accounts is to determine which client’s social security number is attached to the account and then fund that account to that client’s trust. In this way, unless internal institution policy dictates otherwise, there should be no need to close the account. The bank or credit union should only need to change the original signature card for the account to reflect the trust as the new owner. If funding in this way causes a married couple’s assets to be unbalanced for estate tax savings purposes, in order to have a balanced asset allocation for the couple, we will either fund another type of asset to the other spouse’s trust or suggest closing an existing cash account and opening a new cash account titled in the name of the other spouse’s trust. One other thing to note when funding a checking account is that some institutions will require that the name of the trust be named on all checks – even though there is no legal requirement to do so. From our experience, most clients prefer their checks to only list their names. As such, it is prudent to warn the client up front so that they can decide whether to stay with their institution if the institution has this requirement.
Certificates of deposit (CDs) are a special funding concern. If these accounts are re-titled during the term of the CD, there is often a penalty imposed by the institution. In order to avoid the penalty, the client can either wait until the CD matures (and hope that the client doesn’t die during the term thereby causing a probate) or see if a “Pay on Death” (POD) designation can be added to the CD – with the POD naming the client’s trust. One other important concern with funding CDs is to check to see if the CD is a CD-IRA. If it is a CD-IRA, changing the ownership of the account to the client’s trust will result in a taxable distribution thereby making the taxed deferred account immediately taxable. Only the beneficiary of such accounts should be changed to the trust – it is imperative that the ownership of the CDIRA not be changed.
If it is necessary to set up a new account, in addition to needing proof of the existence of the trust, the institutions will have forms that the trustees need to fill out as well as new signature cards. In both the situation of opening a new account as well as re-titling an existing account, if the trustee is not physically able to be at the institution when the account is funded, the forms and signature cards can be sent to the trustee for their signature. The institution, as mentioned above, may require that the trustee also send in a copy of one or more forms of identification with the signed paperwork.
One additional note of caution is with credit unions. Some credit union charters have restrictions which only allow individuals to be account owners (and not trusts). In such cases, if the credit union is unable to re-title or open an account in the name of the trust, the client will need to decide whether to move to an institution that allows trust accounts. If the client is adamant about keeping their credit union account, you may want to suggest holding the account in joint tenancy or have a POD designation. Either approach, however, is not perfect especially if the client becomes incapacitated or if both owners on the account die simultaneously. A power of attorney is crucial in the event of incapacity; as such, in cases where a power of attorney may be needed, we like to submit the power of attorney when funding the account and request that the institution provide a written statement that it will honor the power of attorney in the event of the client’s incapacity. Not all institutions will provide such a written statement, however.
When the client goes to the bank or credit union to fund their cash accounts, in addition to the Affidavit of Trust, we will send the client with written instructions to the institution. The instructions, signed by the client, state: that any beneficiary designations on the account (such as on POD or TOD accounts) be removed so that only the trust will be listed on the account; that the signature card list the number of trustees required to transact business per the terms of the trust; that the same account number be kept if at all possible (for existing accounts); that checks continue to list only the client’s name and not the name of the trust; and the tax identification number that should be used on the account.
The bottom line when dealing with funding cash accounts is to recognize that banks and credit unions will have different requirements on how to fund accounts — differing internal policies can even exist among branches within an institution. Establishing relationships with the various institutions in your community so that you will know the institution’s funding requirements (as well as to have a “go to” person to send your client to) is a positive step toward making the funding process for your client a smooth sailing experience.
