Estate Planning 101

Funding a Trust in Pennsylvania

In this blog post, we will guide you through the various steps involved in funding a trust in Pennsylvania. 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 an essential part of securing your financial future, and setting up a trust is a significant component of many estate plans. Trusts offer several benefits, including probate avoidance, tax efficiencies, and more control over asset distribution after death. However, a trust is only as effective as its funding. Without properly transferring your assets into the trust, it merely exists on paper. 

The process of funding a trust can be complex and varies significantly from state to state due to different laws and regulations. In Pennsylvania, 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 Pennsylvania, understanding the process of funding your trust is vital. 

Types of Trust

Before delving into the process of funding a trust, it's important to understand the different types of trusts that are recognized in Pennsylvania, each offering unique advantages based on your specific estate planning needs.

  1. Revocable Living Trust: Also known as a living trust, this type allows you to maintain control of your assets during your lifetime. It's 'revocable' because you can alter or dissolve the trust whenever you want. Upon your death, assets are passed onto your beneficiaries without going through probate.
  2. Irrevocable Trust: Once established, this type of trust cannot be changed or dissolved without the consent of the beneficiaries. The assets in an irrevocable trust are not considered part of your estate, providing potential tax benefits and protection from creditors.
  3. Charitable Trust: This trust is designed to provide an income stream to a charity of your choice for a certain period, with the remaining assets going to your beneficiaries. It offers significant tax advantages.
  4. Special Needs Trust: If you have a loved one with special needs, this trust ensures they continue to receive financial support without jeopardizing their eligibility for government benefits.
  5. 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.
  6. Asset Protection Trust: This type of trust is designed to shield your assets from creditors. Pennsylvania does not currently allow self-settled asset protection trusts, which means you cannot be a discretionary beneficiary of the trust you establish.

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 Pennsylvania: What You Need to Know

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

Real Estate

In Pennsylvania, 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 county recorder's office in the county where the property is located.

It's important to be aware that transferring your primary residence into a trust in Pennsylvania may impact your homestead exemption, a legal provision that can protect your home from creditors. Consult with a legal professional to ensure you understand the potential implications.

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.

Another option that Pennsylvania residents have is the use of Transfer-on-Death (TOD) or Payable-on-Death (POD) designations. These allow the assets in the accounts to pass directly to a named beneficiary upon your death, bypassing probate. While TOD is typically used for brokerage and investment accounts, POD designations are usually for bank accounts.

It's important to note that TOD and POD designations differ from a trust in that they only address what happens to the asset upon your death, and provide no control or protection during your lifetime. Also, they offer no direction on the distribution of assets if the named beneficiary predeceases you.

When it comes to 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.

Remember, coordinating your financial accounts with your overall estate plan is crucial, and the right choice can vary based on your individual circumstances and goals.

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 Pennsylvania, you'll need to change the title to the name of the trust. This involves filling out a title application with the Pennsylvania Department of Transportation. 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.

In conclusion, funding your trust is a crucial process that requires careful planning and execution. Always remember to keep detailed records of all asset transfers and to consult with an estate planning professional to ensure you're correctly funding your trust and maximizing its benefits.

Tax Implications in Pennsylvania

Funding a trust in Pennsylvania 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 Pennsylvania, 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: Currently, Pennsylvania has a state estate tax, also known as the inheritance tax. The rate varies depending on the relationship of the heir to the decedent. Assets in a revocable trust are included in your estate for state estate tax purposes, while assets in an irrevocable trust are not.
  3. Inheritance Tax: Pennsylvania's inheritance tax is imposed as a percentage of the value of a decedent's estate transferred to beneficiaries by will, heirs by intestacy and transferees by operation of law. The tax rate varies depending on the relationship of the heir to the decedent. The tax rate for transfers to direct descendants and lineal heirs is 4.5%. The rate for transfers between siblings is 12%. The rate for transfers to other heirs (except charitable organizations, exempt institutions, and government entities) is 15%.
  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 Pennsylvania, 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 Pennsylvania.

  1. Homestead Exemption: In Pennsylvania, the homestead exemption protects a certain amount of your home's equity from creditors. Transferring your home into a trust may impact this exemption. Pennsylvania law allows a homestead exemption for property that is used as a self-created trust for the benefit of the grantor. Therefore, if a revocable living trust is properly structured, you should still be able to claim the homestead exemption.
  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.
  3. Asset Protection Trust: Pennsylvania does not currently allow self-settled asset protection trusts. These trusts provide a way for you to protect your assets from future creditors while still being a discretionary beneficiary of the trust. 

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 Pennsylvania:

  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 Pennsylvania'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.