Let’s first address the considerations that might cause you to want to place personal property into a trust during your (the settlor’s) lifetime. First, you may wish to use the trust to avoid probate when you die. Placing your personal property into trust can accomplish this purpose if you properly document the trust’s ownership of the personal property. Keep in mind, however, that some items of personal property can pass without the need for probate proceedings. For example, you can place an automobile into joint ownership with right of survivorship in order to allow the automobile to pass without the need for probate. Likewise, if you have used trusts or beneficiary designations for all of your assets except for your personal property, your heirs could take advantage of the small-estate affidavit procedure if the property remaining in your estate is worth less than $25,000.00. It would be important to have a “pour over” Will in place – a Will that provides that assets remaining in the estate are to be transferred into trust upon death.

Another consideration might be protection of assets from creditors. This type of trust planning is very specialized and requires great care to avoid statutes and legal doctrines designed to protect creditors. Based on these considerations, very few items of personal property would qualify for an asset-protection trust. One reason is that the typical asset-protection trust removes control of the trust property from the person establishing the trust (the settlor). In most situations, one would typically want to maintain full control of personal property assets. As a result, few would use this type of trust planning for personal property. An exception might be an heirloom of great value that spends most of its time in a safe deposit box.

Additionally, some might wish to use a trust to shield personal property from consideration for estate taxes. The same considerations stated above might eliminate most items of personal property from consideration for this type of trust. If one were to establish an irrevocable trust designed to take advantage of estate-tax exemptions, some level of control would be lost. This might be acceptable with the heirloom in a safe deposit box, but not so much with an item used on a regular basis.

There are times when business property is placed into trust for some or all of the reasons identified above. Typically, a business entity is established to maintain the business property – for example, a partnership or a corporation. Occasionally, a trust is used as the business entity, but this method is not as common. In many situations, the shares of a corporation or membership interests in a partnership may be placed in trust for purposes of asset protection, estate-tax planning, or avoidance of probate. These strategies can be quite involved and implicate a number of tax laws.

Given the complexities and tax laws at issue when these planning methods are used, you can understand the importance of accomplishing a proper transfer of personal property into a trust, once that strategy is formulated.

Automobiles and other titled personal property should be transferred into the trust using the title registration process. The expression of an intention to place titled property into trust is, in most instances, insufficient to include the property within the protection of the trust. For example, following the settlor’s death, even if all of the heirs and beneficiaries are in agreement that the titled property should be in the trust, the title registration agency will require documentation that might be obtained only through court proceedings. By using the title registration process at the time the settlor intends to place the property into the trust, the trustees and beneficiaries can avoid doubts regarding ownership of the property. Likewise, establishing good title ownership of the property will help protect the asset from unintended or inappropriate disposition when the settlor becomes incapacitated. To further remove any doubts regarding the trust’s ownership of the titled personal property, care should be taken to use trust funds to pay insurance, maintenance, and other expenses of ownership.

Intangible personal property is another category of personal property deserving of special attention. These assets include bank accounts, certificates of deposit, and the like. It may be sufficient to list these items in a schedule attached to a trust instrument, as long as the trust instrument contains a provision transferring the scheduled assets into the trust. But if this ownership status is not communicated to the financial institution, then the trust’s ownership of the intangible asset can be cast in doubt, and the protections of the trust can be lost. Therefore, the account ownership of such accounts must be updated in order to ensure that these intangible assets are included within the trust.

The more typical items of personal property are tangible and require no title to demonstrate ownership. Examples include household items, furniture, jewelry, and the like. During times of transition (such as moving to assisted living or dealing with assets following death), it can be difficult to maintain control, possession, and documentation of ownership of these items.

When a trust is established, you can use either or both of two methods of transferring these types of property into the trust. First, you can list these items in a schedule to the trust instrument and include transfer provisions in the trust instrument. When you schedule such items, it can be important to specifically list out items of particular value. Appraisals can be helpful when creating these lists and delineating these types of property. At the same time, though, you should include more broad descriptions (such as “all items of personal property”) to catch everything. Another approach is to use an “omnibus bill of sale,” which is a separate document designed to convey all such items of personal property into the trust.

One frequent issue faced with these documents is determining whether specific items of personal property were owned by the settlor when the trust or omnibus bill of sale was executed. Some estate planners use an “after-acquired property” provision to address this issue. There are questions regarding whether an “after-acquired-property” provision is effective, but the protection would certainly be relevant as to intent. The better and more risk-averse practice would be to maintain good records as evidence of ownership, including specific receipts showing the trustee as the purchaser. Likewise, ownership can be evidenced by proof of insurance paid by the trust. Speaking of insurance, don’t forget to have the trust or trustee listed as insured on any items of trust property. Maintaining good records will help you identify the personal property later when your trustee is charged with administering it consistent with the controlling instrument.

Doerner, Saunders, Daniel & Anderson’s Wealth Management Practice Group is closely monitoring the proposed transfer tax legislation in Congress, and we hope this confusion and uncertainty can be clarified by Congress soon. If you have any questions about any of the issues outlined above or a concern that you would like to discuss further, or if you would like us to review your estate planning documents in light of the estate tax and GST repeal, and the scheduled “sunset” of such repeal, please contact one of the following Doerner, Saunders, Daniel & Anderson attorneys who specialize in trusts and estates:

Jeffery C. Rambach
jrambach@dsda.com
918-591-5202

Harry V. Rouse
hrouse@dsda.com
918-591-5325

Kassandra M. Bentley
kbentley@dsda.com
918-591-5259

Varley H. Taylor, Jr.
mailto:cjames@dsda.com
918-591-5288