ESTABLISHING AN IRREVOCABLE TRUST
Any trust that involves the disposition of real estate must be witnessed and notarized, since only notarized instruments may be recorded in land records. Otherwise, there are no formal or statutory requirements concerning the wording or form of trusts.
There are, however, certain key provisions that trust-creating documents should contain. The trust instrument should contain an express statement as to its irrevocability. An irrevocable trust is deemed to be unamendable.
The trust should clearly identify all interested parties, including the grantor(s), the trustee(s), and any and all beneficiaries. This is particularly important when a trust has been created because of its federal and estate gift tax or public benefits implications.
To avoid conflicts between beneficiaries, the trust should state the objectives that motivated establishment of the trust. The trust should also specify successor trustees, particularly if a single individual has been designated trustee rather than an institution or business concern, such as a law firm or bank. Any compensation to the trustee should be spelled out in the document. The basis for trustee succession should be spelled out, and any processes by which successors are qualified or passed over. If the grantor intends to relieve the trustee of bonding or reporting requirements, the instrument should state such an intention.
The grantor is not an intended beneficiary of the trust and it should be expressly stated. Trusts created to provide benefits to designated beneficiaries upon the death of the grantor should state as much and describe the intended disposition of the trust during the lifetime of the grantor.
Although Maryland law specifies that trustees have fiduciary powers and obligations, it may be preferable to designate, in writing, the initial and successor trustees’ powers. Any limitations on investments contemplated by the grantor should be stated, as well as direction with respect to administering investments such as the right to vote stock, sell assets, and register securities.
The trust instrument should also state that the trustee has the right to remove assets from the state, since such authority may be necessary to serve beneficiaries both currently and in the future, and may also be necessary to seek the most advantageous investments for trust properties. The trustee should also be given powers to combine the property of the trust or to terminate a trust that has obviously become uneconomical, and to execute deeds or other documents, or to retain agents and other professional services as they become necessary in carrying out trustee duties for a given estate. The right of trustees to resign, and the manner of their resignation, should be specified.
FUNDING A TRUST
All trust property must be titled in the name of the trust. The comparative complexity or inconvenience of accomplishing this varies according to the nature of the asset being assigned to the trust. Bank accounts, credit union accounts, checking accounts, automobiles, and real property vary considerably in their rules when it comes to changing title. Credit unions often limit granting title in shared accounts to trusts. Customers are often limited to establishing co-title, designating a beneficiary after death, or simply removing funds from the union. Certificates of deposit may be treated by some institutions as having been effectively “cashed out” if they are retitled, unless specific arrangements are made in advance. This may trigger certain penalties. It is therefore very important to negotiate with an institution before retitling a certificate of deposit.
Checking accounts do not present difficulties as to retitling in the name of a trust. However, checks should be redesignated in the name of the trust. Unless an automobile is extraordinarily expensive and/or a specialty car that appreciates in value, it is generally wise to exclude automobiles from trust planning. This is due to the possibility of transfer taxes, and the potential for frequent changes of ownership or other disposal.
Real property can be assigned to a trust only by deed, which must be recorded at the applicable office of land records. No transfer taxes are imposed unless some form of payment is made, which is usually not the case. Because deeds must be notarized, if a trust is to own real property, the instrument creating the trust must also be notarized.
TAXATION OF TRUSTS
Income taxes and transfer (estate and gift) taxes operate by different rules; hence the effects of each on a trust must be analyzed separately. It is advisable to talk with your tax advisor, CPA, etc. regarding the tax ramifications.
Taxpayers who establish revocable trusts do not need to obtain separate Employer Identification Numbers if the grantor or the grantor’s spouse serves as trustee. Most trusts must obtain an Employer Identification Number (EIN) with Form SS-4 (see attached) and file a tax return on the trust income. However, the Family Trust (Irrevocable Trust) prepared by our office does not require a EIN. See letter to CPA.
RECORDS AND PROVISION OF COPIES
Institutions and agents of entities in which a grantor owns interest, stock or assets often request copies of trust documents at the time assets in their firm or institution are conveyed to a trust, but it is often not necessary to provide a copy of the trust if there is a privacy concern – utilize a Certificate of Trust.
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David Wingate is an estate planning and elder law attorney at Estate and Elder Planning by David Wingate. The Estate and Elder Planning office services clients with powers of attorneys, living wills, Wills, Trusts, Medicaid and asset protection. The Elder Law office has locations in Frederick, Washington and Montgomery Counties, Maryland.
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