The following describes the process of transferring assets to fund your revocable trust and to summarize your reserved rights as Settlor and the duties of the trustee and successor trustees and of the personal representative if a probate is opened upon your death.This is a general explanation of what is usually involved in transferring assets, of what your rights as Settlor are, and what the successor trustee's duties are. However, the trust agreement and Hawaii law will be the final authority on what the successor trustee must do, and not this explanation.
Transfer of Assets In order to avoid probate of your assets, you need to transfer ownership of your assets to yourself as trustee of your revocable trust. As described below, you should be able to transfer many of the assets yourself. In other cases, such as real property, we usually assist by preparing deeds or other transfer documents once we have the necessary information. For those assets for which you need our assistance in transferring, we will need the ownership documents or periodic statements so we can have an accurate description of the asset (including any serial or account numbers).
You should review a list of all your assets to see what needs to be transferred and keep track of what has been transferred as you go. The estate planning checklist and any supporting lists that you made in filling in the checklist can serve this purpose.
Checking and savings accounts, stock brokerage accounts, mutual funds. You should be able to open new accounts or transfer fund ownership yourself. The accounts should be opened naming the trustee of your revocable trust. You can get the correct title from either the short form trust or the full trust agreement. The bank or stock broker usually will require a copy of either the short form trust agreement or the full trust agreement. If you do not want the institution to keep a permanent copy of the full trust because of the provisions showing how your asset will be distributed on your death, the institutions will often return the document and keep only the portions that relate to the powers of the trustee and the successor trustee. These are the provisions found in the short form trust, but we have been finding that more institutions are requiring that the full trust agreement be provided at least for their inspection. Most institutions have their own forms to open a new account.
Stocks and bonds. Stock or bond ownership in street name account with a stock broker should not be very difficult to transfer into the trustee's name. If the stock certificates are made out in your name, you may require assistance in completing the transfer. In that case, we will need the stock certificates. If it is stock with restrictions on transfers, we will need a copy of the transfer restrictions. We would also need the name and address of the stock transfer agent, if any. Otherwise, we will need the corporation's mailing address so we can forward the stock assignment document.
Real Property. For real property (land and improvements on land), we usually prepare the necessary deeds. We will need copies of the deeds and title reports and any mortgages or other encumbrances on the property. We will also need the balance owed on mortgages and the mailing address of the mortgage holders if we need to obtain their consent to the transfer.
Life Insurance. For life insurance policies on your life, you need to decide on whether to change the owner of any life insurance policy and also the beneficiaries. The beneficiary designation on a life insurance policy determines who get the insurance proceeds when you die. If you wish to have those proceeds go into the trust, the successor trustee(s) must be the death beneficiary (e.g. John Doe as Successor Trustee of the Bob Smith Revocable Living Trust). If you have a whole life policy, and you wish to give the trustee the ability to borrow against the policy or to surrender it prior to your death, the ownership of the policy should be changed. Please be aware that even if you change the ownership, that since you retain control over this trust, that the face value of the policy will remain in your taxable estate for federal estate tax purposes.
Settlor’s Reserved Rights You have reserved rights as the creator (Settlor) of this trust so that you can change or revoke the trust at any time during your lifetime. You can also withdraw any or all of the assets in the trust and you can add to the trust, so long as the addition does not increase the burden on the trustee.
Trustee’s Duties In general, a trustee must follow his or her duties as described in the trust agreement. However, since you are the Settlor of the trust, you may handle the assets in the trust just as if you had not put them in, using your reserved powers as Settlor. Once you are not acting as trustee, the successor trustee(s) must perform the duties described in the trust agreement. In doing so the successor trustees must act with reasonable care, prudence and diligence in the interests of the trust and its beneficiaries. The trust agreement attempts to give the trustee the maximum flexibility allowed under the law of trusts. For that reason, your trust waives the application of the standards in the Hawaii Prudent Investor Statute. That should give the trustee additional flexibility, especially in retaining assets that you have acquired. However, those more flexible standards relate to the exercise of judgment and to allow a trustee to retain your property or family business where a prudent investor might otherwise have to sell those assets. The successor trustee must at all times act honestly and in the interest of the trust and beneficiaries even under the more flexible standards.
Part of the trustee's duties will be to properly report and pay on all taxes owed by the trust. This may require obtaining federal and state tax identification numbers and filing a number of income, excise, estate and gift tax returns. In connection with these returns, the trustee may also have to send reports to the beneficiaries. One you are no longer the trustee of your own trust, the successor trustee should obtain a new federal identification number. The successor trustee would then file either an income tax return or an information income tax return. Whether the trust needs to pay income tax will depend on the amount of income and the amount of income distributed to the beneficiaries in any given period. The income tax rates for trusts and decedent's estate are very steep, so the trustee needs to be careful about not retaining more income than is required. Otherwise, the trust will pay excessive income taxes.
The trustee must also see that the trust and its assets are properly insured against loss or liability. For most purposes, the trustee is personally liable for torts committed by the trust. Failing to obtain adequate liability insurance can not only jeopardize trust assets, but can also expose the successor trustee to personal liability.
The trustee must be able to account for all funds received and expended throughout the trustee's term of office. This requires detailed record keeping. While a formal accounting may not be required, the trustee must have adequate records to document what was received and spent. If the trustee does not do so, the beneficiaries may hold the trustee liable for any shortages or losses.
If there is more than one trust being created under the trust agreement, the trustee must also keep records showing which assets are in which trust. It is possible for specific assets to be in certain trusts and not in others. In trusts such as the qualified terminable interest marital trust, the various trusts may have a fractional interest in a number of trust assets. The income tax and other tax reporting must be consistent with the allocation of assets to the trusts, and the distribution of assets at the end of a trust must also be consistent with the allocations made.
While the trustee is responsible for properly running the trust according to the trust agreement's terms, a trustee can usually retain the services of professionals such as accountants and attorneys to perform specialized services that is beyond the trustee's capabilities. In this respect, the trustee's job is to retain qualified professionals to get the work done.
Successor trustees who are also beneficiaries of a trust need to be careful in how much control they exercise over the trust assets. The successor trustee provisions limit the powers so that successor trustee/beneficiaries do not end up with the entire trust estate in their own taxable estates. In performing their duties, the successor trustees must be careful not to exercise too much control to avoid the inclusion of trust assets in their own taxable estate.
The successor trustees must coordinate their efforts with the personal representative with respect to various actions such as payment of creditors and filing of various tax returns and elections.
The successor trustee(s) will also be responsible to take over the trust if you become disabled or too ill to continue as your own trustee. The successor trustee(s) can pay your bills and provide for your various financial needs using the trust assets during your disability.
Personal Representative Although much of our effort is to avoid probate, there may be circumstances under which a probate must be done. The most common are those in which assets are not transferred into a revocable trust prior to death of the Settlor and the asset must be probated. There are also a number of estate and gift tax (and federal generation skipping tax) election provisions which state that the personal representative is to make the election. Although most of these can be made by a successor trustee in the absence of a personal representative, the successor trustee needs to check on the situation when you pass away to see if a probate needs to be started to get a personal representative.
The estate may also wish to start a probate to take advantage of a shorter statute of limitations in the Hawaii probate code than is available under other Hawaii state law.
These are all matters that need to be reviewed by the successor trustee(s) after you have passed away. Since there are deadlines on many of the tax elections, the review should be done once the funeral arrangements and memorial services have been completed.