In February I introduced you to Bob, a successful businessman with a typical estate plan and an interesting estate tax return in a blog titled Case Study: How the Best Estate Planning can Still Result in Issues. Like most typical estate plans these days, Bob set up a grantor trust and placed his assets in this trust. A grantor trust is one of the most common types of trusts that I see because it is convenient and avoids probate. If you need a refresher on why it is important to avoid probate, see my last blog.

A grantor trust is convenient because while you are alive, the only thing that changes is the title the assets are held under. Instead of a bank account under his own name, Bob’s bank account is held by “Bob, Trustee of the Bob Trust.” He can still put money in the account, withdraw money from the account or even close the account to go on a whirlwind vacation. Bob has complete control and ownership of the account, even though it is in the name of his trust. And because he has complete control, any income earned from the bank account is reported on his personal tax return and a separate trust tax return is not required.

If you do set up a grantor trust, one of the most important things to do is to make sure you retitle all of your assets into the name of the trust. This process is known as funding the trust. Bob, unfortunately, forgot to retitle one of his brokerage accounts into the name of the trust. Normally when an asset is not funded into the trust, the asset must go through probate which can be a lengthy and expensive process.

Fortunately for Bob, he was a resident of California. In California, if an unfunded asset meets certain requirements, a Heggstad petition may be used to bring that asset into the trust without having to go through probate. However, with a Heggstad petition you still need to work with the bank or brokerage firm holding the asset. For Bob’s estate, it took six months of constant calls to move his brokerage account into the trust.

A grantor trust, like every other estate planning tool, can be very effective if done right and very costly if not done right. Make sure you follow through with your estate plan and keep up to date on what you need to do. Bob was very diligent in funding his trust and because of that, his one misstep was forgiven and he was able to avoid probate.

For more information please call LSL CPAs & Business Advisors at 714.569.1000.

By Suzanne Lieber