Putting the “Fun” in Funding:
As an estate planner, you have probably encountered this scenario in your practice: adult child comes into your office to check on his or her elderly parents’ revocable living trust (“RLT”). You review the documents – and lets assume, in this case – they look fine. Your next question – or perhaps your first question – to the adult child is, “what’s in the trust?” or “what does the trust own?” At this point, adult child is confused and has no idea what is in the trust. Neither do mom or dad. You review the estate planning binder or the envelope containing the legal documents and still do not have an answer. Maybe you find a Schedule A, which is either blank (to be filled in at a later date, of course) or lists a property down in California, which you invariably learn was sold fifteen years ago.
Keeping track of how assets are titled for every client can seem like an impossible task, but is actually an easily-achievable goal. Yes, it is time consuming and byzantine when being forced to interact with large financial institutions. Yes, the types and number of assets people own can be varied and large. Yes, the client will usually not want to pay large sums of money for the amount of time it will take the attorney to actually complete and document the funding process for the client. However, with drafting software, a streamlined process for obtaining asset information, and a simple framework for verifying the status of trust and non-trust assets, the attorney can empower the client to complete their own funding inside a system that a third party could easily understand.
Going back to the example of the adult child, after several letters, phone calls, and meetings, hopefully you have a good idea of what is in the trust. Obviously, this process is a lot easier and cheaper when the Settlors are still alive. If adult child is coming into your office after the Settlor has passed away, figuring out what the trust owns will be more difficult and it may be too late to avoid having to probate stray assets.
As an estate planner, you have full control over the RLT-funding process for your clients. While it’s difficult to find any universal standards for the funding of RLTs, simply adapting a few commonsense approaches can allow the successor trustee or another attorney to easily know the status of trust-owned and non-trust-owned assets.
During my time in practice, I’ve spoken with several attorneys about their process for funding RLTs. I quickly learned that every practitioner has their own system and that no two systems are alike. Many practitioners have the client come to their office to sign the various legal documents, then send the client off with the legal documents in hand and several pages of instructions on how to fund the RLT. Although the instructions are clear, most clients lack the patience and fortitude to see the funding process through and the RLT is never fully funded.
On the other end of the spectrum, the attorney or an assistant (if the attorney is afforded this luxury) take on the funding of the trust for the client. While this method may be comprehensive, it is time-consuming, labor intensive, and such a service will inevitably increase the cost for the client. Moreover, verification of trust assets or updated and correct written beneficiary designations are often lacking, leaving the successor trustee the difficult job of determining the status of the Settlor’s assets. Even if the trust is properly funded at the time the RLT was established, what about assets bought or inherited in subsequent years? Are these assets going to be properly transferred and documented? If so, by whom? The client? The attorney? Clearly, this approach also has drawbacks.
Your own practice as an estate planner may mirror one of these approaches or fall somewhere in between. The process described below is a systematic approach to funding RLTs. The benefit of this approach is that it not only assures the RLT is properly funded, but results in a verifiable paper trail showing the status of the client’s assets. Thus, a third-party, be it the successor trustee or another attorney, can hit the ground running should trust administration become necessary.
Some of you may have already created your own system but for other practitioners looking to harness available technology, offer clients a superior product, and have a verifiable approach to completing the RLT funding process, the following four steps are easily adaptable.
1). Get all the necessary asset information from the client BEFORE they sign the legal documents.
This can be broken down into a process using two separate forms. For example, Form 1 and Form 2. Using Adobe Acrobat Pro, a form can be filled in by the client on a computer (or for the less tech-savvy clients, printed out and filled in by hand). Form 1, in addition to gathering biographical and family information, asks simple questions about the assets a person or couple owns. Do you own real estate? If so, how many items? Do you have bank accounts? If so, how many? Do you own vehicles? If so, how many… and so on. You get the idea.
The list of types of assets is invariably long and the answer to many of the items on the list is no – most people do not have stock options, stock certificates, or airplanes, – yet you might consider making the list of possible assets on Form 1 as exhaustive as possible.
Form 2 is where the client is asked to provide more detailed information about her assets.1 Instead of sending the client a massive form where she is asked to find the assets she owns and fill in the requested information, the information provided on Form 1 allows you to reduce or entirely remove extraneous categories. For example, if the client said she had six bank accounts, the Form 2 Word doc shows only six spaces for them to fill in. This is done for all the assets mentioned in Form 1 and can be done quickly on the administrative end. The modified Form 2 is then converted into a writeable PDF and sent to the client to fill in and return.
The asset information requested on Form 2 is relatively basic. For real estate, ask for the address, contact information for the lender, the mortgage account number, and the approximate outstanding balance on the mortgage. For financial accounts, life insurance, and retirement accounts, ask for the contact information of the institution, the account or policy number, and the approximate value of the death benefit. For other assets like vehicles, business interests, and promissory notes, ask for identifying information and approximate values. Instead of asking for a list or inventory of tangible personal property, consider requesting an approximate value.
Getting asset information prior to signing the legal documents is important for several reasons. First, it helps determine the size of the estate and the level of planning needed. Second, asking clients to fill out forms lets you quickly learn whether the client is willing to work with you or is going to be a difficult customer. Finally, if you wait until after the legal documents are signed to address funding the RLT, you risk the client never returning because he or she assumes the job is done after the legal documents are signed.
A strict interpretation may suggest that the appointment to sign the trust documents is never scheduled until Form 2 has been completely filled out and returned to your office.
2). Design the RLT-funding process from the perspective of the successor trustee
From a logical standpoint, it makes sense to design the funding portion of the RLT from the perspective of the successor trustee. While the client likely has a good grasp on her own assets, the successor trustee (typically a relative or close friend) doesn’t have the foggiest idea. Thus, it makes sense to design the funding to assist the successor trustee in administering the RLT as easily and efficiently as possible. The job of the successor trustee will be much harder if it is necessary to track down information about the deceased person’s assets.
Put yourself in the shoes of the successor trustee (or perhaps you’ve already served in this role) – what information would you want? First, you need all the legal documents. Having the trust agreement, the pour-over will, the certification of trust, the power of attorney, and the advanced healthcare directive in one, easily accessible place is obviously important.
Next, what assets did the trust own? Using the information from Form 2, consider having a spreadsheet that lists every asset, showing whether it will be put in the trust or will remain outside the trust. Each asset listed should have contact information, account or policy numbers, and the approximate value. There should also be a space for any miscellaneous notes and suggested beneficiary designations, where necessary.
While a list or spreadsheet is a good starting point, there is more to creating an organized, readily accessible system. Making sure written verification is included after each asset is the lynchpin in creating the funding paper-trail. Otherwise, the successor trustee will see that an asset was designated to be transferred to the trust, but will not know if the asset was actually ever transferred into the trust. Wouldn’t you prefer to know that the real estate was actually deeded into the trust? Wouldn’t you prefer to have a bank statement showing that the old joint Chase bank account is now owned by the trust? If a business interest is assigned to the trust, wouldn’t you want the assignment to be kept in the binder? Of course you would. Creating such a system for your own practice is relatively simple.
For example, have a specific tab in the estate planning binder devoted to the asset list that contains the asset spreadsheet followed by an individual page for each asset that corresponds to the assets listed on the spreadsheet. Each individual asset page should be followed by the verification that the asset was transferred into the trust. For real estate, the original deed should follow the specific asset page. For bank accounts, the first page of a bank statement showing the account is owned by the trust will follow. For assignments of business interests or promissory notes, the assignment will follow the specific asset page.
3). Assist the Settlor with Transferring Real Estate and Assignment of Interests, Give Instructions on all other Assets
For most clients, their assets consist of real estate, personal property, bank accounts, automobiles, brokerage accounts, life insurance policies, and retirement accounts. When dealing with real estate, the attorney can prepare the deed transferring the interest into the trust. The attorney can also draft assignments for personal property and certain business interests. For all other types of assets, the client is instructed to mail or deliver to the various institutions form letters prepared by the attorney. After the institution has transferred the asset, the client is instructed to place a written verification that the asset has been put in the trust following the individual asset page for the account. The form of verification can either be a letter from the institution saying the asset has been placed in the trust or a subsequent monthly statement that has some variation of the word “trust” where it used to only say the client’s name. This process is also repeated for insurance policies and retirement accounts but instead has written verification of the updated beneficiary designations.
With the introduction and widespread use of so-called “virtual assets” (e.g. Facebook, email, Paypal, etc.), I would be remiss if I didn’t discuss handling these ever more common items. As a recent Newsletter article recommends, clients should be instructed to create a Virtual Asset Instruction List (“VAIL”) and to keep the VAIL in either the estate planning binder or in a safe-deposit box that the successor trustee can access. The VAIL should include usernames and passwords for all of the client’s virtual accounts and will allow the designated representative access should the client become incapacitated or die.
When the client completes the organization described above, she has provided the successor trustee with a snapshot of her assets as of the date of the signing of their trust. Obviously, the client will acquire new assets and get rid of others. Showing that individual assets have been sold or are no longer in existence is as easy as crossing it out of the spreadsheet and the asset page.
For later acquired assets, it is easy to provide the client with a blank spreadsheet – let’s call it the Later-Acquired Asset List (“LAAL”) – where she can add assets that have been purchased or acquired since the date of the trust signing. Spaces are provided for information about the asset. By now, the client will know to include the necessary form of verification for the individual asset similar to the earlier process.
Thus, if the client completed the funding process and diligently listed new assets on the Later-Acquired Asset List and then dies or becomes incapacitated, the successor trustee (or the attorney assisting the successor trustee) could look through the binder and see the verification for each asset either owned by the trust or passing through beneficiary designation. All the time and expense wasted trying to figure out what assets the decedent owned will be unnecessary.
In order to create the RLT funding paper trail, it is imperative that the client understand and follow through with the process described above.
Now you are probably thinking that most clients, for whatever reason, are not going to actually complete this simple, yet time-consuming funding process if it is left up to them, which leads to the…
4). Complimentary One-Year Trust Funding Review
Consider developing a process so that when your clients sign a RLT, the price charged includes a complimentary one-year review of the trust funding. When the client returns after one year, examine the binder as if she just died. Did the client follow your instructions? Are the proper verifications in place? If they are in place, great! If things are lacking, you can quickly and easily give them feedback on what needs to be done. If the client chooses to not follow the instructions, she is free to do so, but at least you can sleep easily knowing you have provided the tools and the framework for making sure the funding gets completed and is verifiable.
While these trust funding review meetings only take thirty to forty-five minutes, the benefits of these meetings are enormous. First, as the client knows she will be returning in one year to have you review the funding homework, she is more likely to follow through the with the funding process. Second, by not charging to answer questions about the trust funding, the client the client is supported and feels like they are receiving good value with the follow-up complimentary visits. Third, these meetings allow you to discuss with the client the current status of state and federal trust and estate laws. Fourth, the client is compelled to review and examine their estate plan on a semi-regular basis. Finally, these meetings maintain and strengthen the attorney-client relationship, encouraging the client to refer their friends and to use you and for any necessary additional legal work
Finding the System that works best for your practice:
The system described above is simply one approach. Moreover, the RLT funding paper trail is considerably easier to implement when using drafting software such as Hotdocs to generate the spreadsheet, letters, and asset pages. I have no doubt that Oregon’s innovative and intelligent estate planners have many approaches that I have failed to consider or mention in this article. A great resource and starting point for information and practice tips is the subchapter “The Importance of Funding the Trust” in Bar Books: Administering Trusts in Oregon.
As the general population ages, RLTs will only become more ubiquitous. If estate planners continue to share and work with each other over how to best fund RLTs, all attorneys and their clients will benefit. I look forward to this ongoing collaboration.