Transferring Assets Into And Out Of A Trust

By: Randall A. Denha, J.D., LL.M.

There are many different types and forms of trusts.  That said, all trusts fall into one of two categories: revocable or irrevocable. Transferring property out of a trust can be simple or nearly impossible, depending on which kind of trust you formed.

How Revocable Trusts Work

Typically, you act as the trustee if you form a revocable trust. You retain control of the property you place into it. You can sell it or move it back out of the trust as you see fit. You can completely undo the trust if you decide the arrangement isn’t working for you after all.

But all a revocable trust can do for you is avoid probate of the property it holds when you die. You can name a successor trustee to take over management of the trust for you if you should become incompetent. This way, the court doesn’t have to appoint a conservator to oversee your personal affairs. A revocable trust doesn’t protect your property against creditors, lawsuits against you or estate taxes, because you technically retain ownership of the property held within it.

Irrevocable Trusts are Different

You cannot act as trustee when you create an irrevocable trust and place property into it, called “funding” the trust. You must step aside. You no longer own that property – your trust does – so you’re not entitled to take it back. You don’t have a voice in whether it should be sold or money from the trust should be invested or how. Only the trustee you’ve appointed can decide these things.

Once you have given an asset to the Irrevocable Trust, the asset belongs to the trust. At its most basic level, Asset Protection and Estate Planning with an Irrevocable Trust stems from this fact: if properly drafted a person can give assets to an Irrevocable Trust and his future creditors cannot take that asset. You no longer own the asset; the Trust owns the asset. This type of trust can own almost any type of asset, but before transferring any asset, a thorough discussion should be had with competent counsel.

In exchange for relinquishing all control over the property you used to fund the trust, you get several perks. Not only will it avoid probate, but neither creditors nor anyone with a judgment against you can touch it. It does not count toward the value of your estate for estate tax purposes, nor does it count toward your net worth should you need to qualify for Medicaid or other government assistance.

The following are some of the Irrevocable Trusts routinely used with a brief description of each for your Jeopardy or trivia night with friends:

• Spousal Lifetime Access Trust (SLAT): A SLAT is an Irrevocable Trust used typically by married couples to provide asset protection and tax planning for a spouse and descendants and which uses the gift tax exemption while allowing the spouse access to assets.
• Irrevocable Life Insurance Trust (ILIT): An ILIT is an Irrevocable Trust used to remove life insurance from the Grantor’s probate and taxable estate.
• Disclaimer Trust: Usually used in a Will or Trust, a Disclaimer Trust refers to a protective trust for a surviving spouse funded with assets that the surviving spouse could have taken outright, but instead “disclaimed.” The Will or Trust’s terms then dictate that these disclaimed assets pour into the “Disclaimer Trust.”
• Dynasty Trust: A Dynasty Trust is designed to last forever, sheltering assets from generation to generation from divorce, lawsuits, and various taxes. Typically, these trusts are used by clients who wish assets to remain within and benefit only their descendants.
• Grantor Trust: or “Intentionally Defective Grantor Trust” is an Irrevocable Trust technique where the Grantor has given away the asset to the trust, but the Grantor still pays the income taxes due on the trust assets. This shifting of income tax burden allows the Grantor to make an additional gift to the trust each year, but the IRS views it as a penalty, not gift.
• Grantor Retained Annuity Trust (GRAT): GRAT planning involves the Grantor giving assets to an Irrevocable Trust but getting back an annuity. Typically done to shift assets to descendants, the goal is to transfer assets without triggering Gift Tax recognition.
• Qualified Domestic Trust (QDOT): Used when one spouse is not a US citizen. The QDOT allows the US Citizen spouse to leave assets for the non-citizen spouse’s care without triggering taxes.
• Qualified Personal Resident Trust (QPRT): Parents often use a QPRT to transfer a home to descendants at a low gift tax value. The Grantor gives the home to the Irrevocable Trust but receives back the right to the home’s rent-free use.
• Education Trusts: Education Trust refers to an Irrevocable Trust created to distribute assets only for the beneficiaries’ education. Typically designed for the Grantor’s descendants.
• Charitable Remainder Annuity Trust (CRAT): A CRAT is an Irrevocable Trust used in charitable estate planning where the Grantor gives the Irrevocable Trust an asset but receives back a fixed annuity payment.
• Charitable Remainder Uni-Trust (CRUT): A CRUT is an Irrevocable Trust used in charitable estate planning where the Grantor gives the Irrevocable Trust an asset but receives back an annuity payment that is tied to the assets fair market value rather than a fixed annual amount.
• UniTrust: A UniTrust refers to an Irrevocable Trust that distributes assets to the beneficiary based on a percentage of the net assets in the trust on a given date. Rather than giving the beneficiary “all income” which can vary from year to year or even be zero, a UniTrust gives the beneficiary an amount every year even if there is no income.
• Bypass Trust: A Bypass Trust is a technique that shelters the first spouse’s estate tax exemption. Typically, the surviving spouse has access to the funds but at the surviving spouse’s death the remaining assets “bypass” that spouse’s estate and pass estate tax-free for descendants.
• Credit Shelter Trust: A Credit Shelter Trust is a technique where the deceased spouse’s estate and generation skipping tax exemption is “sheltered” and preserved. Typically, the surviving spouse has access to the trust funds, but at the surviving spouse’s death, the remaining assets pass to descendants free of estate and generation-skipping taxes.
• Marital Trusts: A Marital Trust is typically used along with a Bypass or Credit Shelter Trust to hold the portion of the deceased spouse’s assets that exceed the death tax credit. The assets are held for the surviving spouse sheltered from creditors or future spouses but are part of that spouse’s taxable estate. If drafted properly the trust qualifies as part of the “Marital” exemption, hence the name.
• AB Trust: An AB Trust or AB Trust is a combination of a Credit Shelter Trust (the “A” Trust) and a Marital Trust (the “B” Trust). These trusts are used by married couples to shelter all of the deceased spouse’s assets in protective trusts but keeping the tax-exempt assets separate from the assets which are not tax exempt at the first spouse’s death.
• Pet Trust: The trust allows you to plan for the care of your pet if you pass away. The trust also covers any pets that may be in gestation at the time of your death. By creating a trust for your pet, you are ensuring they maintain as close to a normal life as possible.

Moving Property out of a Revocable Trust

As long as you’re mentally competent, you can remove property from your revocable trust at any time. If you’re not competent, your successor trustee or power of attorney can do so. It’s simply a matter of reversing the process by which you funded the trust with the property in the first place.

For example, if you transferred real estate into your trust, you would have done so by deed, granting it from your name personally into the name of your trust. If you want to take the property back, it’s simply a matter of drafting a new deed that grants title from your trust’s name back to your name. The same process works with titles to vehicles or bank accounts. If you named the trust as beneficiary of your retirement accounts or life insurance policy, you simply fill out new beneficiary designation forms, switching things around again.

If Your Trust Is Irrevocable

None of this will work if you’ve created an irrevocable trust, or at least it won’t be that simple. If you have the express written agreement of all the trust’s beneficiaries and the trustee as well, they – not you – might be able to ask the court to intervene. If everyone is on the same page and they present a good argument for moving property out of the trust, the judge may issue an order allowing it to happen. The beneficiaries and trustee would have to establish that the original terms of the trust no longer serve the purpose you had in mind when you formed it.

The trust might then be “decanted,” effectively emptied of everything it holds. That property would then transfer to a new trust created by the trustee, one with more favorable terms. Ownership would not necessarily revert back to you.

If you included provisions for a trust protector in your original trust documents, you can call upon this third party to make the change. In most cases, that change must be something you outlined in the beginning, such as wanting to remove property at a certain time and only if specific circumstances should arise.