Trust Funding & the Probate Omnibus Bill

An unassuming provision in the probate omnibus bill may prove to be a trap for some unwary practitioners.

SB 0769, the 2017 Probate Omnibus Bill, has been transmitted to the Governor for his signature. One of the more perplexing provisions of the incipient law is Section 13, which adds the following to the end of T.C.A. § 35-15-402, Requirements for Creation [of a Trust]: 

(d)   A lifetime trust is valid as to any assets held by the trust to the extent the assets have been transferred to the trust. For purposes of this subsection (d):

(1)   Assets capable of registration, such as real estate, stocks, bonds, bank and brokerage accounts, and the like, are transferred to the trust through the recording of the deed or the completion of registration of the asset in the name of the trust or trustee. Assets that are capable of registration are not transferred to the trust through only a recital of assignment, holding, or receipt in the trust instrument; and

(2)   Assets not capable of registration, are transferred to the trust through a recital of assignment describing the asset with particularity in the trust instrument.

The statutory change simply confirms what most practitioners already know: in order to fund a trust, you must re-title assets in the name of the trust (or trustee). The only exception is “assets not capable of registration,” such as tangible personal property. So what is the purpose of this change?

Evidently, there is a significant number of attorneys who believe that a statement of intent, without more, is sufficient to transfer assets to a trust. These practitioners simply identify in the trust instrument (or a separate declaration of trust) which assets are purportedly held in trust. The basis for this belief appears to be T.C.A. § 35-15-401(2), which refers to a “declaration by the owner of property that the owner holds identifiable property as trustee.” However, this statute only applies to the creation of a trust. Funding it, as the amendment makes clear, is a separate matter.

The amendment takes effect July 1, 2017. However, it merely makes existing rules explicit. Therefore, practitioners who rely on a declaration of trust for pre-July 1 transfers do so at their peril.

For more discussion of SB 0769, see the posts here and here.

Source: SB 0769 (pdf)

Posted by Joel D. Roettger, JD, LLM, EPLS

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