This is part 2 of our experience in setting up our basic estate planning, which included a revocable living trust. Please read part 1 Will and Trust Through Employer Legal Plan for the background.
After we signed the trust documents at the lawyer’s office, we had a small stack of paper. Other than ourselves and the lawyer who drafted the documents, nobody else knew that the trust even existed. Just hanging on to the stack of paper wouldn’t do much for us. We had to let the trust own some assets. The trust only has effect over the assets it owns.
Putting assets under the name of the trust is called funding the trust. The lawyer told us many people didn’t follow through in funding their trust. They ended up wasting the money and the effort in creating the trust in the first place.
In part 1 I covered how we transferred our home from under our own names to under the name of the trust. That was done very easily. We also added the trust to our homeowner’s and umbrella insurance as an additional named insured. Next we needed to change the ownership of our investment accounts from Joint Tenants With Rights of Survivorship to the trust.
We only had to do it to regular taxable accounts. Retirement accounts such as 401k’s and IRAs would stay in our own names. Although you can name the trust as the beneficiary of those retirement accounts, our lawyer said we should just name individual persons as beneficiaries in order to preserve the ability to stretch the distributions. She said there was a way to make the trust the beneficiary and still make it possible to stretch the distributions but it would be an overkill for us.
We have investment accounts with Fidelity, Vanguard, and Merrill Edge. I sent a secure message to customer service at each company asking what their procedures were. Each company responded quickly with clear instructions. They all have well established procedures with different degrees of difficulty.
Fidelity has a Trust Application form and a Certification of Trust form. The Trust Application opens a new account in the name of the trust. To transfer over an existing account already in individual names, you just put the account number(s) in Section 4.
The Certification of Trust form requires signatures to be notarized. Instead of using Fidelity’s form, I just attached a copy of the trust certification document prepared and notarized by our lawyer.
I dropped off the forms at a local Fidelity investor center. The trust account was opened in the afternoon on the same day. Two days later all assets in the existing joint account were transferred over as-is to the new trust account. The joint account was automatically closed. All cost basis and lot information came over intact.
This was the easiest and smoothest. Because the trust account was a new account, I had to set the preferences again for dividend and capital gains distribution (reinvest or put into cash), cost basis accounting (average cost, first in first out, or actual cost), linked bank account, etc.
Vanguard also required a new trust account application. The application was done by filling out a PDF form online through DocuSign. Because all new accounts at Vanguard must be a brokerage account now, we couldn’t stay on the simpler mutual-funds-only platform any more. The new brokerage account for the trust was created the next day after we completed the electronic signatures through DocuSign.
Next we needed to transfer the existing joint account to the new trust account. To be honest I was very afraid that Vanguard would screw up the cost basis accounting during the transition. I read multiple reports on the Bogleheads investing forums that Vanguard had trouble in keeping the cost basis straight. I printed out everything from the existing account. I would have to check line by line to make sure they transferred correctly.
Vanguard’s ownership transfer form asked for a Medallion Signature Guarantee. I asked around. Nobody was interested in giving a Medallion Signature Guarantee to make it easy for a competitor. They would give it for their own forms but not someone else’s. I don’t blame them.
Vanguard was aware of this situation. Its instructions specifically said we should contact customer service for additional options if we were unable to obtain a Medallion Signature Guarantee. I called. The rep said because we were co-trustees of the trust account and joint owners of the existing account, we could just send in the form without the Medallion Signature Guarantee.
I mailed the ownership transfer form. The transfer completed after 10 days.
Instructions from Merrill Edge were also very clear. We had to fill out a trust application, a trust certification, a letter of authorization, and attach the first page and the last page of the trust document. The trust certification had to be notarized. I asked the local Bank of America branch whether they could do it for me. They said they couldn’t but they would reimburse me for the notary fee if I had it done elsewhere. That worked. We had it notarized at a package shipping service store.
Instead of opening a new account under the name of the trust and transferring assets from the existing account to the new account, Merrill Edge would do it by simply changing the title on the existing account. The account number wouldn’t change. The linked bank account and all other settings wouldn’t change either. In a way this method is simpler.
I mailed the documents to the address given in the instructions. A trust concierge called me and asked some clarifying questions. The title change completed correctly about a week after they are satisfied with the answers.
Say No To Management Fees
If you are paying an advisor a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.
Very clear article on what was involved.
I was wondering if you looked into other low cost packages other than the one you mentioned in part 1? For instance I believe Suzio O has a package she offers with support to walk you thru about the same items.
Harry Sit says
I didn’t. My main motivation was to get it done after having it on the to-do list for so long. Cost (within reason) wasn’t a big concern. Suze Orman’s package looks like a software product similar to Nolo’s. I wanted to have it done by a human lawyer even though the human lawyer may very well just use an existing template anyway.
As far as funding the Trust, here is how we handled our Joint Revocable Trust in Texas. Our will stipulates that at the passing of the remaining spouse, any assets not in the Trust will be transferred to the Trust through probate. The probate process in Texas is fairly straightforward and not expensive. We’re not concerned about the public nature of probate, and this funding technique provides us the flexibility to fund or not fund the Trust during our lifetimes. Of course, we can bypass the Trust entirely using asset beneficiaries or JTWROS account titling. Any thoughts?
Harry Sit says
I figured after we went through the trouble in creating a trust we might as well take advantage of it by funding it. Probate is expensive in California. It takes some effort up front as documented in this post and the previous one. I see it as an investment to make it easier for the survivors.
When I did mine a few years back, I opened a new account at Merrill Edge and collected a bonus in the process. Vanguard accepted voice authentication for the transfer in lieu of medallion signature.
I notice you transferred your home to your revocable trust. Here in Texas we get a homestead exemption and an over-65 exemption on our property taxes — most of our taxing entities “freeze” the tax level once age 65 is reached. Question: When the owner is a trust, rather than an individual, would these tax exemptions be lost?
Harry Sit says
I don’t know about Texas. My county in California automatically mailed me a new application for exempting $7,000 from the assessed value if I say it’s a primary residence.
Michelle Paluck says
The Texas homestead exemption & over-65 exemption are not lost if the home is in a revocable trust. You must include a copy of your driver license(s), a copy of your Certificate of Trust, & the deed recording number showing the Trust as the current owner.
Brian Trombley says
How did it end with Vanguard? I’ll have to do the same thing shortly.
Harry Sit says
Shares came over. Cost basis didn’t [yet]. I sent a secure message to customer service asking about the cost basis.
Harry Sit says
Cost basis now came over correctly. Make sure every position in the source account is set to SpecID before the transfer.
Brian T says
Very good to know. Did you have to engage with customer service to make that happen, or was it automatic and simply took time?
Harry Sit says
It simply took time. Customer service replied to my initial inquiry by saying basically “Just wait.”
If you transfer your brokerage account (Fidelity) into a trust, does it still show up when you log in so you can easily transfer funds between accounts (use it to fund IRA, transfer shares to a DAF)?
Harry Sit says
It does. In the trust application you give the name and the social security number of the trustee(s). Then it shows up together with the trustee’s other accounts (IRAs etc.).
If you have signed up for Vanguard’s voice recognition problem, you will not need any medallion signature guarantees.
For custodians like these who only require a Certification of Trust to open the new trust account, please be aware that this will make the paperwork requirements a lot more difficult after the trustee(s) dies and the successor needs to step in. They like to make things appear easier when opening the account by not requiring that you provide a copy of your trust document at that time. However, once the control person changes, the custodians typically change their tune rather dramatically and make a paperwork nightmare for your successor trustee and beneficiaries. Of course, you won’t be around at that point, so maybe you won’t care. But, on the other hand, isn’t the main point of a revocable trust to make things smoother after you die? This is the dirty little secret no one talks about.
Can you be more specific? What do you mean by a “paperwork nightmare”? What is it that the survivors will have to do?
Some unscrupulous financial advisors (& certain attorneys) love to sell you revocable living trusts that in most states have dubious benefit, but create the illusion that they are providing some complex customized service. This “service” retains you as a client because you likely don’t really understand it and must rely upon the advisor for interpretation, and it also creates an additional source of fees for them. You can spot these redundant & spurious trusts when they are something like 100 pages in a big binder. If you went to a reliable attorney because of a legitimate need for a trust, most purposes can be achieved with a trust under 10 pages. Either way, you’ll find that custodians love to open new accounts and take your money, so all they require up front is a 2 page Certification in which all you say is that the trust exists. However, when both the trustor (creator) of the trust and initial trustee die, then the custodian (your bank or broker) will suddenly and unexpectedly need to complete due diligence on the new “owners”… your successor trustee. Before allowing any action to be taken on your trust account, the following will often be required: 1. Full copy of notarized original trust document (hopefully your trustee can find this after you die), 2. Personal identification and information on new trustees and beneficiaries the same as if they now own the account, 3. Certification of acceptance by successor trustee and 4. Occasionally, signed instructions from the executor of your estate stating that they have no claims on the trust. Lastly, if your trustee obtains good legal advice, he/she will likely want to get releases signed by all beneficiaries before making any distributions for any reason. This can take just as long as the estate settlement process. So much for bypassing probate!
d. ferolito says
you can usually get a medallion signature done at your bank
For Vanguard accounts , do you have to re-do the account preference , re-link bank accounts?
Is there a problem of linking the account inside the trust with a bank account outside the trust as the tittle of the accounts are different.
Harry Sit says
It’s a new account. You do have to re-do the account preferences and re-link the bank accounts. No problem when the bank account is owned by the trustee.
I am in the process of “funding my trust.” I was wondering what the difference was between naming the trust as a beneficiary of my joint brokerage account vs creating an whole new trust account and transferring assets (I have a merrill edge acct). I think I asked my lawyer this but forgot the answer. It seems a lot easier to just name the trust as a beneficiary and that will achieve my goal.
Am I missing something here? Why do I have to create a trust account?
Harry Sit says
Merrill Edge does it by changing the title of an existing account from an individual or joint ownership to a trust.
I also have an account with Merrill. They allowed me to designate my revocable trust as the contingent beneficiary for my IRA, as well as transfer on death (TOD) designation for my other accounts. I think you could also change the ownership of the your non-IRA accounts to your trust with you being the trustee. This would fund the trust, but you would still control the assets. I’m not a lawyer, so confirm all this with yours.
I think that it’s important to understand why you’re setting up a trust in the first place, and to understand the advantages and disadvantages. Although many people think of a trust as an entity that kicks in when you die, it can easily be used if you’re unable (or even unwilling) to do your financial accounting because of illness and/or mental inability. Depending on your state and the titling of the trust, there is also a potential creditor protection component although this is something that an attorney should advise you on.
For Vanguard, having to transfer your assets to a new account, what tax implications did this have?
Harry Sit says
No tax implications when assets are transferred, not sold to cash, and when the owners of the old account are the trustees and beneficiaries of the new trust account.
Why bother putting your Fidelity etc. accounts in the trust? Why not just set up beneficiaries as you do with a bank account? Easy to change, easy to set up, no setting up a new trust account at the brokerage. And, the assets can be distributed right away by the executor without going through the trust.
The only reason I would do a trust is for property.
Am I missing something here?
Harry Sit says
Retirement accounts allow beneficiaries, but not all financial institutions allow payable-on-death designations on taxable accounts. If you have simple needs and you use financial institutions that allow payable-on-death designations, it can work as well. For this reason payable-on-death accounts are sometimes called a poor man’s trust.
Craig R says
Re the tax implication question from 11/5/18, do you have to get an TID# and file a separate tax return for the trust? Or do dividends and gains still get reported on your individual/joint tax return as before?
Harry Sit says
A revocable living trust does not need its own tax ID or tax return. All the income is taxed to the grantor(s). It becomes irrevocable when the grantor(s) die. Then it will need a tax ID and file separate tax returns.
Nick N says
Thank you for these articles. Just joined my employer legal plan to get this off my to do list as well. Did you consider donor advised funds for your retirement accounts?
I have a JTWROS Cash Management (checking) account at Fidelity that is held jointly with my spouse. We only use this for our checking/bill pay. Should I list the Trust as the primary beneficiary of this account? My understanding is with JTWROS that if one of us were to pass they other would retain control, but listing our Trust (also at Fidelity) as primary bene – would anything held in the CMA go to our trust if we were both to die?
My financial advisor had me set up a Revocable Trust as part of my financial plan. He re-registered one of my accounts to place in the Trust. Advisory Termination fees, along with other fees, were charged on the original account. Is this just part of transferring assets to a Revocable Trust? From the reading I have done, it does not seem like standard practice.
Harry Sit says
Please ask your financial advisor or the institution that charged you the fees. None of the institutions I dealt with charged any fees for switching from a personal account to a trust account.
Thank you for your reply. The advisor that reregistered my account is no longer with the company and my new advisor (within the same company) has yet to respond. I will probably have to run up the chain at this point.
Anureita Rao says
I have a fairly dumb question about Vanguard. I filled the form online and then it generated a form for me to download, print and email in. The instructions said ‘Print the entire form, even the blank pages.’ However the entire download was 62 pages long ( instructions, fee schedules etc.). The actual form seems to be just 5 pages long. Do you recollect if what you mailed in was more on the order of 5 pages or 60-something pages?
Harry Sit says
Not 60 pages. The instructions and disclosures are for you to read and keep. They don’t need those back.
Jeremy Iron says
I have a question. If you do not have a home or any other real assets and just have a bank account and a brokerage account with a beneficiary listed on both. Do the person still need a Trust or a Will for these two items?
Hopefully someone here can provide some guidance. I am being told my a trust attorney that individual accounts first need to be converted to a joint account before funding the trust account in order to avoid estate taxes. It seems ludicrous to have to go through that intermediary step. (We’re in Colorado for reference.)
I’ve been getting mixed messages from other sources on what assets should and should not be included in revocable living trusts (under simple common financial situations for people with non-complicated estates in the state of California).
For example, some say only deeded property (like houses and autos) need to be funded in a trust. And that 401Ks and IRAs should not be included in the trust (instead just add a beneficiary to these accounts). Others say include all assets, but if you do include mutual funds, do not also have beneficiaries on these accounts because that can cause problems.
(I have minor dependents so that might be a complicating factor in my case.)
Can you clarify?
(Also, if mutual funds do indeed need to be funded in the trust, is it possible to do so by generically designating all Vanguard assets without individually identifying each sub-account within Vanguard? Because if I decide, for example, to sell part of my Vanguard bond fund and buy a Vanguard stock fund, I don’t want to have to amend my Trust to list the new Vanguard sub-account.)
Harry Sit says
The lawyer who created the trust document for us advised against putting vehicles under the name of the trust. 401k’s and IRAs can’t be in a trust. At best the trust can be a beneficiary and even that may not be a good plan because the distribution rules are different when the 401k/IRA beneficiary is a person (or persons) versus a trust. Once an account is in the name of a trust, beneficiaries on the account will be irrelevant because the trust doesn’t die. When an entire Vanguard brokerage account is in a trust, new funds within the account are automatically in the trust. If you still have old-style individual Vanguard mutual fund accounts, the trust account can only be a brokerage account because Vanguard doesn’t let you open old-style mutual fund accounts anymore.