Estate Planning 101

Funding a Trust in Maryland

In this blog post, we will guide you through the various steps involved in funding a trust in Maryland. We'll cover the types of assets you can use, how to transfer different kinds of assets into the trust, and the state-specific regulations you need to be aware of. We'll also discuss the potential tax implications and the importance of maintaining your trust over time.
April 10, 2024

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Estate planning is a critical aspect of managing your wealth and ensuring your loved ones are taken care of after your death. One of the most effective tools for estate planning is a trust. A trust can offer numerous benefits, including avoiding probate, providing for minors or special needs loved ones, and potentially reducing estate taxes. However, a trust is only effective if it's properly funded. Funding a trust involves transferring your assets into the trust.

The process of funding a trust can be complex and varies from state to state due to different laws and regulations. In Maryland, there are specific rules and procedures to follow when funding a trust. Whether you're setting up a revocable living trust, an irrevocable trust, or any other type of trust recognized in Maryland, understanding the process of funding your trust is crucial.

Types of Trust

Before we delve into how to fund a trust, it's important to understand the different types of trusts that are recognized in Maryland. Each type of trust offers unique advantages based on your specific estate planning needs.

  1. Revocable Living Trust: This type of trust can be altered or dissolved during your lifetime. It allows you to maintain control of your assets while providing for a seamless transfer to your beneficiaries upon your death, bypassing the probate process.
  2. Irrevocable Trust: Once established, this trust cannot be changed or dissolved without the consent of the beneficiaries. Assets in an irrevocable trust are not considered part of your taxable estate, which can provide significant tax advantages.
  3. Asset Protection Trust: This trust is designed to protect your assets from creditors. Maryland law does not currently allow self-settled asset protection trusts, meaning you cannot establish an asset protection trust for your own benefit. However, you can establish an asset protection trust for the benefit of other beneficiaries.
  4. Special Needs Trust: This trust allows you to provide for a loved one with special needs without jeopardizing their eligibility for government benefits.
  5. Charitable Remainder Trust: This trust provides you or other named beneficiaries with income for a certain period, after which the remaining assets go to a charity. It offers significant tax advantages.
  6. Testamentary Trust: This trust is created through your will and only becomes active after your death. It provides a level of control over how your assets are distributed to your beneficiaries.

How to Fund a Living Trust

Funding a trust involves the process of transferring your assets into the trust. If you've chosen a revocable living trust, which is popular due to its flexibility and control, here's a step-by-step guide on how to fund it.

  1. List Your Assets: Start by making a comprehensive list of your assets. This can include real estate, bank accounts, stocks, bonds, business interests, personal property, and other investments. Remember, to get the benefits of a trust, you need to transfer all your significant assets into it.
  2. Create a Trust Agreement: With the help of an estate planning attorney or online estate planning service like Snug, create a trust agreement. This document will include details like the name of the trust, trustee, successor trustee, and beneficiaries.
  3. Transfer Ownership of Assets: Once the trust agreement is in place, the next step is to transfer ownership of your assets into the trust. For real estate, you'll need to draft and record a new deed transferring the property to the trust. For financial accounts, you'll need to contact your bank or brokerage to change the ownership to the trust. Personal property without titles can be transferred with an assignment of ownership that lists the items being transferred.
  4. Fund the Trust: After transferring the assets, you need to fund the trust with some amount of money. This can usually be a nominal amount, such as $10.
  5. Keep Records: Maintain detailed records of all asset transfers into the trust. This can be crucial for settling disputes and for your own personal reference.
  6. Update Over Time: As you acquire new assets, remember to add them to the trust. Regularly review your trust and keep it updated to reflect your current financial situation and wishes.

Adding Assets to a Trust in Maryland: What You Need to Know

Funding a trust involves transferring ownership of your assets to the trust. In Maryland, the process varies depending on the type of asset. Here's what you need to know:

Real Estate

In Maryland, real estate assets such as homes, land, or other properties can be transferred into a trust by creating a new deed in the name of the trust. The most common type of deed used for this purpose is the warranty deed, which guarantees that the property title is free of any liens or ownership disputes. To execute the transfer, the deed must be signed in the presence of a notary and then recorded in the land records office in the county where the property is located.

Financial Accounts

Transferring financial accounts such as bank accounts, investment accounts, and certificates of deposit into a trust involves contacting your financial institution and completing the necessary forms to change the ownership or beneficiary to the trust. Typically, you'll need to provide a copy of your trust agreement or a certification of trust.

For retirement accounts like 401(k)s and IRAs, these generally aren't transferred into a trust due to potential tax implications. Instead, you could consider naming the trust as a beneficiary. However, this option should be carefully considered with the help of a financial advisor or tax professional to understand the potential tax consequences and distribution rules.

Personal Property

Transferring personal property such as furniture, jewelry, artwork, and other belongings into a trust can be accomplished using an assignment of ownership or bill of sale. These documents should clearly list the items being transferred. For valuable items, it's often advisable to specifically list them in the trust document to avoid any potential disputes. Note that for items of minimal value, a general assignment might be sufficient.

Vehicles

To transfer a car, boat, or other vehicles into a trust in Maryland, you'll need to change the title to the name of the trust. This involves filling out a title application with the Maryland Motor Vehicle Administration. It's important to note that transferring vehicles into a trust can have insurance and liability implications, so it's recommended to seek professional advice before doing so.

Business Interests

If you own interest in a business, this can also be transferred into your trust. For LLCs and partnerships, this involves assigning your interest to the trust. For corporations, you'll typically need to reissue stock in the name of the trust. However, transferring business interests can have tax implications and might violate buy-sell agreements or other business contracts. Therefore, it's advised to consult with a business attorney before making any transfers.

Life Insurance and Other Policies

There are two main ways to incorporate life insurance into your trust. One option is to name the trust as the beneficiary of the policy. The other option is to transfer ownership of the policy to the trust. Both options have different implications for control over the policy and for estate taxes, so it's important to consult with an estate planning professional to determine the best strategy for your circumstances.

Tax Implications in Maryland

Funding a trust in Maryland can have several tax implications. It's crucial to understand these as you set up and fund your trust, to ensure you're making the most tax-efficient decisions. Here are some key points to consider:

  1. Income Tax: In Maryland, revocable living trusts are considered "grantor" trusts. This means that for income tax purposes, the trust is not a separate entity, and all income, deductions, and credits are reported on your personal tax return. However, if you have an irrevocable trust, the trust becomes a separate taxable entity and must file its own tax return.
  2. Estate Tax: Maryland is one of the few states that has its own estate tax. If the total value of your estate, including assets in a revocable trust, exceeds the Maryland estate tax exemption amount, estate tax may be due. Assets in an irrevocable trust are not included in your estate for estate tax purposes.
  3. Inheritance Tax: Maryland is also one of the few states that has an inheritance tax. However, assets that pass through a trust to a spouse, child, parent, grandparent, or sibling are exempt from the inheritance tax.
  4. Gift Tax: When you transfer assets to an irrevocable trust, it's considered a gift. If the value of the gift exceeds the annual gift tax exclusion amount, you may have to file a gift tax return. However, you generally won't owe gift tax unless the total amount of your gifts throughout your lifetime exceeds the lifetime gift tax exemption.
  5. Property Tax: In Maryland, transferring property to a trust should not trigger a reassessment of property taxes, as long as the trust beneficiaries are the same as the original owners.

Homestead and Asset Protection

In the realm of estate planning, asset protection is a key consideration. The impact of funding a trust on your homestead exemption and asset protection strategies are crucial aspects to consider in Maryland.

  1. Homestead Exemption: In Maryland, the homestead exemption protects a portion of your home's value from being seized by creditors. Transferring your home into a trust may impact this exemption. It's important to consult with a legal professional to ensure you understand the potential implications.
  2. Asset Protection: Transferring assets into a revocable living trust does not protect them from your personal creditors. This is because you retain control of the assets and can revoke the trust at any time. However, assets in an irrevocable trust are generally protected from your creditors, because you have effectively given up control of these assets.

It's important to note that these protections are not absolute and can be subject to certain exceptions. Hence, when setting up a trust, it’s essential to work with an experienced estate planning professional to best structure your assets for protection while staying within the boundaries of the law.

Maintaining a Trust

Setting up a trust and funding it with your assets is just the first step in the process of effective estate planning. Maintaining your trust over time is equally important, to ensure it continues to serve your needs and objectives. Here are some key points to consider when maintaining a trust in Maryland:

  1. Regular Reviews: Review your trust document regularly, at least once a year or whenever there is a significant life event like a birth, death, marriage, or divorce. This allows you to ensure that the trust still aligns with your current wishes and circumstances.
  2. Adding New Assets: As you acquire new assets, don't forget to add them to your trust. Any significant assets not in the trust at the time of your death would have to go through probate, defeating one of the main purposes of having a trust.
  3. Record Keeping: Keep accurate and up-to-date records of the trust's assets. This can be instrumental in resolving any potential disputes and provides a clear picture of the trust's holdings.
  4. Tax Filings: If your trust is irrevocable, it becomes a separate taxable entity and you'll need to file an annual tax return for it. Ensure these filings are done on time and accurately.
  5. Changes in Law: Laws related to estate planning and trusts can change. Stay informed about any changes in Maryland's trust laws or federal laws that might impact your trust.
  6. Professional Guidance: Consider regular check-ins with your estate planning attorney or advisor. They can provide valuable guidance on managing and maintaining your trust, ensuring it continues to serve your estate planning objectives effectively.

Remember, a trust is a living document that can and should be adjusted as your life, assets, and laws change over time. Proper maintenance will ensure your trust provides the benefits you intended.