Understanding Revocable and Irrevocable Trust Documents. By Terri D. Thomas, JD March 23, , Terri D.

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1 Understanding Revocable and Irrevocable Trust Documents By Terri D. Thomas, JD March 23, , Terri D. Thomas 1 Trusts (Page 3) Purpose A completed transfer of ownership of property. Freestanding legal entity. Can be established for any lawful purpose. 2 1

2 Legal Entity #1 (the Individual) Grantor- Power to create terms of the trust, may retain power to amend or revoke, has authority to designate Trustee/Successor Trustee, powers of Trustee, and determines Beneficiaries. Property Legal Entity #2 (the Trust) Trustee- Manager and legal representative of trust entity. Holds title to trust property. Owes fiduciary duty to Beneficiary. Beneficiary- Receives the benefit of the trust. 3 Parties (Page 3) Grantor- establishes trust, appoints trustee, determines beneficiary, determines the property, determines successors and how successors step into the place of trustee. Trustee- legal representative, controller of assets, protector of property, fiduciary responsibilities to beneficiaries. Beneficiary- receives the benefits of the trust, has no power over management, bound by trust terms. Property- Trust will not exist until funded. 4 2

3 Trust Types (Page 4): Revocable- Grantor reserves the right to amend or revoke trust or specific trust terms. Irrevocable- Grantor does not have the right to change the trust or any of its terms after creation. 5 Popular purposes- Tax planning (Irrevocable Trusts) Avoid incapacity proceedings (Revocable Trusts); Avoid probate (Revocable Trusts). 6 3

4 Requirements (Page 4): Grantor has legal capacity Grantor/Donor owns the property Grantor intended to create Beneficiary specified Trustee designated Legal purpose Rule Against Perpetuities in some states 7 Living v. Testamentary Trusts (Page 5) Living (a/k/a Intervivos)- Trust is created (funded) while grantor is alive. Testamentary (a/k/a Pourover Trust)- Trust is created by terms of a will or terms of another trust as a result of the death of the grantor. Loving??? 8 4

5 Uniform Trust Code (Page 6) Provides for use of Trust Certification (see Page 17); Third Party not liable for Trustee s actions if acting in good faith and without actual knowledge of a problem; Gives Trustees a broad list of automatic powers; Can appoint authorized signers unless trust document prohibits; Some states allow for certifications, even though the UTC has not been adopted.* 9 For most other states, variations of Uniform Trustees Powers Act (Page 8) Does not deal with documentation issues (neither allows nor prohibits Trust Certification); No clear third party liability language and no definition of actual knowledge; Does not appear to permit authorized signers unless trust document permits. 10 5

6 Establishing a deposit account for a trust (Page 9): Obtain an Affidavit/Certification of Trust signed by the Trustee (or Grantor in non-utc states) certifying that Trustee has powers to negotiate transactions on behalf of the trust; Or obtain a copy of the first page (showing legal name of trust), page with trustee, page with trust powers (showing authority to act on account) and signature page (for non-utc states); Do not read or keep a copy of the entire trust agreement. Why? Creates actual knowledge ; Account titling tips at Pages 19 and Account Titling Tips- Revocable Trusts (Page 19) Title: The John Doe Living Trust dated , John Doe, Trustee or John Doe, Trustee of the John Doe Living Trust dated Ownership: Beneficial ownership vested in beneficiary(ies) of trust. CIP: Name Address TIN: Trust EIN or grantor's SSN (if grantor is alive and going to report the interest earned on his/her personal tax return). Certification of Trust or copies of certain pages of the trust document showing legal name, trustees, trustee s powers and grantor s signature. Other Non-documentary verification TIN for tax reporting: Trust EIN or grantor's SSN FDIC Insurance: Living Trust (including grantor trusts): $250,000 per qualifying beneficiary (natural person, not-for-profit or charity). 12 6

7 Account Titling Tips- Irrevocable Trusts (Page 20) Title: The Doe Family Trust dated , First City Bank, Trustee Ownership: Beneficial ownership vested in beneficiary(ies) of trust. CIP: Name of Trust Address of Trustee TIN: Trust EIN Certification of Trust or copies of certain pages of the trust document showing legal name, trustees, trustee s powers and grantor s signature. Other Non-documentary verification TIN for tax reporting: Trust EIN (although the IRS can give some types of apparently irrevocable trusts the ability to use the grantor s SSN. This is the case with an intentionally defective irrevocable trust. ) FDIC Insurance: $250,000 per beneficiary as long as trust meets certain tests. DO NOT PROVIDE SPECIFIC ADVICE ON WHETHER THE TRUST IS FULLY INSURED. The trust agreement can be submitted to the FDIC for an opinion. 13 Questions 14 7

8 Blank Instruments/Blank Certifications (Page 10) If revocable trust, grantor can complete or change terms; If irrevocable trust, refer to attorney that drafted the instrument; Do not complete blanks in trust instrument on behalf of the grantor; Do not take responsibility for completing Certification of Trust. 15 Transferring Accounts into a Trust (Pages 10 and 11) Certification of Trust does not give the trustee power to put the grantor s personal accounts into the trust; The trust instrument might provide authority for the trustee to move accounts into the trust (or may show the grantor s intent to have the accounts in the trust name); Grantor may execute a power of attorney giving another the power to place property into the trust. 16 8

9 Lending to a Trust (Page 11) Examine the entire trust agreement to confirm that there are no limitations on the trustee s borrowing /pledging authority if retaining a copy, don t share with the deposit side; If permitted by state law, obtain a trust certification in which the trustee confirms the unrestricted power to borrow and pledge; Verify that the trust owns the property being pledged to secure the loan; Note: Grantor can not shift assets between a revocable trust and individual ownership to avoid repayment of debt; Note: As of October 3, 2015 loans to revocable trusts created for tax or estate planning purposes will be consumer loans for the purposes of Regulation Z and X. 17 How is the contract signed? On deposit relationships John Doe, Trustee of the John Doe Living Trust u/a dated January 5, /18/

10 On loan documents: John Doe, Trustee of the John Doe Living Trust u/a dated January 5, 2000 AND if grantor, revocable trust, may want to add the grantor to the promissory note as a co-borrower or guarantor. Why? So the financial institution has the choice as to which party to collect from at any given time (although a revocable trust can t be used to avoid repaying the loan). John Doe, Individually 19 Other issues and problems (Page 12): Co-trustees (joint or separate powers)- Two trustees- presume powers must be exercised jointly, unless document states otherwise. More than two trustees- typically, majority rules. Successor trustees- follow trust instructions. Certification may have necessary information on how the successor is chosen. If no one is identified, court order is required

11 POA to Bob Legal Entity #1 (the Individual) Grantor- Power to create terms of the trust, may retain power to amend or revoke, has authority to designate Trustee/Successor Trustee, powers of Trustee, and determines Beneficiaries. Property Legal Entity #2 (the Trust) Trustee- Manager and legal representative of trust entity. Holds title to trust property. Owes fiduciary duty to Beneficiary. Beneficiary- Receives the benefit of the trust. Successor Trustee is Mary 21 Powers of attorney/authorized signers (Page 13)- General rules: Attorney in Fact exercising Trustee powers- rarely valid because the POA was given by the Grantor on behalf of himself (not by the trust, which is a separate legal entity). Should be specifically authorized by both the Trust and the POA document. Grantor as principal of POA - won t normally affect the property owned by trust unless the POA specifically gives the Grantor s powers to the Attorney in Fact (either under the POA or under state law). Then the Attorney in Fact may have the power to amend or revoke. Authorized signers on trust accounts- under UTPA, must be specifically granted in document. Under UTC, allowed unless document prohibits

12 As payable on death beneficiary (Page 14)- normally allowed (may have to name successor trustee in titling). Do not allow an account owned by a trust to have a payable on death designation. TRUSTS DON T DIE! Joint Tenancy (Page 14)- Probably permitted, but why use it? Trusts still don t die! Policy decision. Potential problem for successor trustees with commingling of assets. Safe Deposit Boxes (Page 14)- Definitely encourage. Trust owns right to access. Only owns contents if trust agreement transfers contents to trust. Depositing Checks Payable to the Trust into the Grantor or Trustee s Personal Account (Page 15)- Creates liability for depositary bank under Notice of Fiduciary Breach Rule (UCC 3-307) 23 UCC Notice of Fiduciary Breach Rule The Danger to Depository Banks (b) If (i) an instrument is taken from a fiduciary for payment or collection or for value, (ii) the taker has knowledge of the fiduciary status of the fiduciary, and (iii) the represented person makes a claim to the instrument or its proceeds on the basis that the transaction of the fiduciary is a breach of fiduciary duty, the following rules apply: o (1) Notice of breach of fiduciary duty by the fiduciary is notice of the claim of the represented person. o (2) In the case of an instrument payable to the represented person or the fiduciary as such, the taker has notice of the breach of fiduciary duty if the instrument is (i) taken in payment of or as security for a debt known by the taker to be the personal debt of the fiduciary, (ii) taken in a transaction known by the taker to be for the personal benefit of the fiduciary, or (iii) deposited to an account other than an account of the fiduciary, as such, or an account of the represented person

13 Multiple Beneficiaries and FDIC Insurance (Page 16)- terms will dictate how assets are to be divided. This is the responsibility of the trustee, not the Third Party. Under FDIC/NCUA rules, do not need to have beneficiary information on file for living, revocable trusts. Will be insured $250,000 per beneficiary, as long as a natural person, charity or not-for-profit entity; For Irrevocable Trusts, do not advise as to whether an Irrevocable Trust is fully FDIC insured. While the trust is insured $250,000 per beneficiary, this insurance may not be available if there are contingencies on the distributions. The document should be submitted to the FDIC for a formal opinion. 25 Terri D. Thomas tthomas@ksbankers.com TTS Dan Heldmann info@ttstrain.com Upcoming Webinars March 24 th Compliance Perspectives: A Monthly Update March 29 th Limited Liability Companies: Do s and Don ts March 30 th Opening New Accounts I Legal Ownership of Consumer Accounts March 30 th Opening New Accounts Three Part Series April 5 th Uniform Commercial Code Rules: How to Comply to Attach and Perfect Secured Transactions April 5 th Handling Checks after Death of the Account Holder April 6 th Using Personal Tax Returns for Global Cashflow: What's Cashflow and What Isn't April 7 th Advanced Topics in Commercial Lending April 11 th The Bank CEO Guide to 5 Keys to a High Performing Sales Team April 12 th Flood Insurance Compliance Hot Spots 26 13