Estate planning is a critical part of financial planning, providing a roadmap for the distribution of your assets after your death. One of the most effective tools in estate planning is a trust. A trust allows you to place assets under the care of a trustee for the benefit of your chosen beneficiaries. However, the trust only becomes effective when it's funded, i.e., when you transfer ownership of your assets into it. The process of funding a trust can be complex and varies from state to state. In this post, we'll guide you through the process of funding a trust in Tennessee.
Types of Trust
First, let's understand the different types of trusts that can be created in Tennessee. Each type of trust serves different purposes and offers distinct advantages based on your specific estate planning needs.
- Revocable Living Trust: This trust can be altered or dissolved during your lifetime. It allows you to maintain control of your assets and change the terms of the trust as needed. Upon your death, the assets are passed onto your beneficiaries without going through probate.
- Irrevocable Trust: This 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.
- 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.
- Special Needs Trust: This trust ensures that a loved one with special needs continues to receive financial support without jeopardizing their eligibility for government benefits.
- 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
Here's a step-by-step guide on how to fund a revocable living trust in Tennessee:
- List Your Assets: Begin by making a comprehensive list of your assets. This can include real estate, bank accounts, stocks, bonds, business interests, personal property, and other investments.
- Create a Trust Agreement: With the help of an estate planning attorney or an 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.
- 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.
- 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.
- Keep Records: Keep detailed records of all asset transfers into the trust. This can be crucial for settling disputes and for your own personal reference.
- Update Over Time: Regularly review your trust and keep it updated to reflect your current financial situation and wishes. As you acquire new assets, remember to add them to the trust.
Adding Assets to a Trust in Tennessee: What You Need to Know
In Tennessee, the process of transferring assets into a trust varies depending on the type of asset. Here's a quick guide:
Real Estate
To transfer real estate into a trust in Tennessee, you'll need to create a new deed in the name of the trust. This deed must be signed, notarized, and recorded in the county where the property is located.
Financial Accounts
To transfer financial accounts into a trust, contact your bank or brokerage. They will provide you with the necessary forms to change the ownership or beneficiary of the account to the trust.
Personal Property
Personal property without titles can be transferred into a trust using an assignment of ownership. This is a simple document that lists the items being transferred.
Vehicles
In Tennessee, vehicles can be transferred into a trust by changing the title to the name of the trust. This requires filling out a title application with the Tennessee Department of Revenue.
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.
Life Insurance and Other Policies
Life insurance policies can be incorporated into your trust either by naming the trust as the beneficiary of the policy, or by transferring 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 Tennessee
Funding a trust in Tennessee can have several tax implications. Here are some key points to consider:
- Income Tax: In Tennessee, 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.
- Estate Tax: Tennessee does not have a state estate tax, so funding a trust will not have direct estate tax implications at the state level. However, at the federal level, estate tax may apply if your estate exceeds the federal estate tax exemption amount. Assets in a revocable trust are included in your estate for federal estate tax purposes, while assets in an irrevocable trust are not.
- Inheritance Tax: Tennessee also does not have an inheritance tax. Therefore, your beneficiaries will not owe state inheritance tax on assets they inherit through the trust.
- 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.
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 Tennessee.
- Homestead Exemption: In Tennessee, the homestead exemption protects a certain amount of your home's equity from creditors. Transferring your home into a trust may impact this exemption. Tennessee 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.
- 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 Tennessee:
- 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.
- 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.
- 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.
- 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.
- Changes in Law: Laws related to estate planning and trusts can change. Stay informed about any changes in Tennessee's trust laws or federal laws that might impact your trust.
- 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.
