Nice Trust, But What’s in It? Analyzing Funding for Revocable Trusts
Every experienced estate planning attorney begins to, at some point in their career, realize that the practical execution of trust funding can be very different from simple execution of the documents with only a basic schedule of assets attached. I often tell my clients that the execution of their trust documents is only the first step to setting up their estate plan. The second, and equally important, step is making sure that the trust receives initial funding and is properly funded after execution while the client still has the time and ability to do so. To be certain, a trust should include a schedule of assets so that a successor trustee knows what assets are in the trust they have been tasked with administering, but more work is often required.
Real Property
The most common funding source for trusts that I see is real property, which can be transferred via deed in trust or via assignment of a beneficial interest should a fee simple transfer of the real property not be feasible/advisable. Particularly for a fee simple transfer it is highly recommended that the last deed of record be pulled, not just to verify the legal description and grantor language, but also to be certain that your client(s) is/are the sole title holders with the right to make the transfer. A title commitment is also preferable to ascertain that your clients have the ability to make the transfer or, should running a title search not be an option, language in your deed in trust stating that the documents were prepared without title examination.1 A further examination of tax implications should also be had to determine if the transfer should be inter vivos or upon the passing of the grantors via a transfer on death instrument. Depending on what type of trust is being employed, and what tax exemptions the client is currently receiving, a transfer during their lifetime could cause significant complications with future property tax bills. Finally, for real property, it is a good idea to see what the client’s intent for the real property is. If it is to be sold upon the grantor’s passing, this can be accomplished without further funding. However, if the intent is for the real property to be held for the benefit of another, it is key to advise the client that the trust needs liquidity to maintain the real estate for however long the real property is to remain in trust. Otherwise, the trustee may be forced to liquidate the real property rather than incur holding costs the trust cannot pay.
Interest/Ownership in Corporation or LLC
Another common funding source is stock in a corporation or membership interest in a limited liability company (LLC). Corporations and LLCs have many fundamental differences. However, for purposes of trust funding, the outline of what steps need to be taken is relatively similar. For corporations the first step is ascertaining ownership. It is advisable to request copies of the articles of incorporation, stock certificates and any other proof that your client holds the stock in the corporation the client claims to have. If the proposed corporation is small or closely held (especially those not set up by attorneys) it might very well be that the articles of incorporation refer to shares of stock that your client never made certificates for. The creation of stock certificates is a best practice irrespective of any estate planning needs and should be an automatic first step for any estate planning pertaining to a corporation. Next, if not spelled out in the articles of incorporation, a review of any shareholder agreements and the corporation’s bylaws is critical to make sure that the shares have no restriction upon their transfer. Should there be such a restriction then the next step is to see whether the governing documents can be amended with the authority of your clients (which could be a separate article). If there is no shareholder agreement or bylaws these should be created and expressly state that the stock/ownership is freely transferable. Once it is ascertained there is no restriction an assignment can be prepared transferring the ownership into trust. It is advisable that this transfer be kept with your client’s estate planning documents and with the corporation’s records. Should the stock be on a registry this should also be updated immediately.
For LLCs the process is similar. As with corporations you should first look at the articles of organization to determine the members of the LLC and if it is member managed or manager managed (and ascertain the manager if need be). Similarly to the corporation, if an operating agreement exists it should be reviewed to make sure membership interest is freely transferable to the proposed trust. For small or single member LLCs, it is not uncommon for the member(s) to not have an operating agreement. I highly recommend one be drafted to (a) sort out any conflicts between the members; and (2) make it expressly clear that a member can freely transfer or assign their interest without the consent of the other member(s).2 Finally, as with corporations, the proposed assignment of membership interest should be kept with both the estate planning documents and with company records. If need be, notice of the transfer should be given to the other members.3
Personal Property
While personal property is, seemingly, one of the simplest assets to fund a trust with, that same purported ease also makes it one of the most overlooked matters when it comes to trust funding. Some personal property items of value, such as expensive watches, gems, etc., may have certificates of ownership that should be reviewed if your client can produce them. Upon review to ascertain ownership (if there is any proof of ownership), one should create a personal property assignment listing all items with as much specificity as possible assigning all right and title to said items to the proposed trust. Those same items should be listed in the asset schedule of the trust as well. Keep in mind for other items, such as vehicles, the title transfer may have to be effectuated through a secondary agency such as the office of the Secretary of State. This article, of course, is not meant to weigh in on the wisdom of such transfers, in particular transfers of known liability magnets such as automobiles.
Liquid Capital
As stated above, for the preservation of certain assets held in trust, or as one possible probate alternative, your clients may look to fund the trust with liquid capital. Follow up once the trust documents are executed is critical here as your client will need to set up a bank account in the name of the trust and transfer funds. While this sounds, and in fact is, rather easy to accomplish, as is the case with personal property, this step is often overlooked because it requires your client to take steps after your final meeting to set up the account and transfer funds. I highly recommend you mention the need for funding your client’s trust as well as steps to accomplish this funding to your client in any close out letters you send. Ideally, this will remind your clients to work on the funding process after the estate planning is “out of sight, out of mind” for them.4
Cynically, this letter also serves to cover your firm in the event the funding is never accomplished and you have to deal with angry heirs or beneficiaries. I also recommend you get the name of the bank from your client they will set this account up at and mark it for your file.
Good files make for good trust administration. I highly recommend that your office keep a list of all trust assets, where they are held, and status on funding. It is not rare for a trustee to have the regrettable task of having to administer a trust without knowing what exactly is in said trust. Proper attention to detail and planning can make sure that your clients’ trusts are properly funded to make the administration as easy as possible.
Appendix
September 21, 2024
Jane Doe
123 State Street
Windy City, IL 60060
Re: Estate Planning Follow Up
Dear Jane:
Thank you for choosing Lythberg Law for your estate planning needs. At our last appointment on XX/XX/2024 we executed the following documents: a Revocable Living Trust, two Deeds into Trust, an Assignment of Personal Property, a Last Will and Testament, and powers of attorney for health care and property.
I have returned your original executed documents to you. Please keep them where you keep the rest of your safe and secure belongings. Original documents carry particular legal weight in Illinois, so it is imperative to keep these secure. Should you wish to amend your estate plan at any time please let me know. I shall have your estate planning documents scanned into my system for point of reference or absolute emergency but must emphasize they do not carry the same weight as the originals. The original deeds will be mailed to you after they are properly recorded. As discussed during our appointment, you have already paid the recording fee for all documents. You may receive letters in the mail purporting to have a “certified” copy of your deeds available for a fee. Often times these letters are scams and, should you receive one, we ask that you contact our office prior to expending any funds for an alleged deed copy.
In order to receive the full benefit of your trust documents it is imperative that your trust be funded, meaning that assets you wish to have placed into trust must be formally transferred into trust. Our office is handling the real estate transfers, but needs action on your part to transfer your accounts at Vanguard and Chase Bank. Our office requests that you bring a copy of these documents to your financial planner and banker so that these transfers can be coordinated. Please feel free to contact our office to help assist with this process or help coordinate with your financial planner and banker.
If you have any questions regarding anything stated in this letter, please contact me immediately at 815-239-0200. It was a pleasure working with you.
Very truly yours,
Cameron T. Lythberg
Cameron T. Lythberg is a solo practitioner at Lythberg Law, LLC in Joliet, Illinois. His practice includes real estate, estate planning and administration, business law, and litigation. In addition to his work on the Trusts and Estates Section Council, Cameron is also a member of the Real Estate Section Council and ISBA General Assembly. He is also active in the Will County Bar Association where he currently chairs the county’s Civil Litigation Committee and is an incoming Director. Cameron is also an enthusiastic member of the Joliet Estate Planning Council.
1. The language in my deeds in trust (where I have not done a title search / had a commitment issued is as follows: “This Deed was prepared without benefit of title examination or opinion. No warranty or guaranty of any kind whatsoever is made by its preparer as to the state of the title of the property which is described in this Deed.”
2. The Limited Liability Company Act is somewhat vague about interest transfers. Is it a distributional interest? An ownership interest? Are there now legal obligations or capital contributions required? All parties (the transferor, other Members/Managers, and the trustee/successor trustees) should understand what is occurring.
3. For further information, see Sherwin D. Abrams, Introduction to LLCs for Estate Planning & Probate Lawyers, ISBA Trusts and Estates Newsletter (December 2023).
4. A sample close out letter from my office is appended below. Each letter is slightly tailored for the client but this should be a good reference point.