1.         UNTITLED PROPERTY.

Assets which do not have a title such as tangible personal property (furniture, furnishings, clothing, personal effects, jewelry, tools, and so forth) can be transferred into a revocable living trust by use of a general assignment to trust or bill of sale form. A sample of such a form follows:

BILL OF SALE

Seller, [insert your name], whose residence and post office address is_____________________________________, in consideration of TEN AND NO/100 DOLLARS ($10.00) and other good and valuable consideration, receipt of which is acknowledged, hereby sells, assigns, transfers and sets over to [insert your name] as Trustee of the [insert your name] REVOCABLE TRUST dated ____________________, the following described tangible personal property:

All tangible personal property owned or hereafter acquired by the Seller including, but not limited to, household furniture and furnishings, items of household use or ornament, kitchen contents, works of art, jewelry, collections, garden and lawn equipment, personal effects, tools, home entertainment equipment, recreational equipment, boats, motor vehicles, family memorabilia, books, personal papers, and all other goods and chattels.

       Seller has executed this Bill of Sale this ___ day of _________, 200__.

________________________________

                      [insert your name]

2 .         MOTOR VEHICLES.

The documentation required for transferring a motor vehicle into a revocable living trust is much the same as if the motor vehicle were being sold to the trust. The ownership certificate, safety inspection and registration need to be presented to the Department of Finance, Motor Vehicle Branch together with a $3.00 fee and the Trust Agreement or a Short Form Trust. The Department of Finance, Motor Vehicle Branch will accept a photocopy of the Trust Agreement or Short Form Trust but must be shown the original at the time of the transfer. Transferring the motor vehicle into the trust can be done by taking the documentation down to the Department of Finance, Motor Vehicle Branch located at 1041 Nuuanu Avenue, Honolulu, Hawaii 96817, or sending it through one of the Satellite City Halls. Some casualty insurance companies will assign a business rating to motor vehicles held in a trust name, resulting in an increase in insurance premiums. Under Hawaii law, a motor vehicle is exempt from probate so transferring it into the Trust is no longer necessary in order to keep it from going through probate. It is still wise to transfer it into your trust, however, so that it can be sold in the event you become incapacitated and to avoid argument among heirs at the time of your death.

3.         SECURITIES.

   a.  INDIVIDUALLY HELD SECURITIES.

            If you own stocks and/or bonds in your individual name, it is necessary to have these stocks and bonds re-registered into the name of your revocable living trust. This can be done by sending the certificates to the transfer agent together with a stock or bond power in which the transferor's (your) signature has been guaranteed by either a national bank or stock brokerage company. It would be wise to send the certificates and stock power by registered mail. An alternative way to do this would be to hire a brokerage company, set up a brokerage account in the name of your revocable living trust, and deliver the certificates to your account manager. Where there is no corporate trustee or corporate successor trustee, it is strongly recommended that securities be held in a brokerage account. This will greatly simplify matters for your successor Trustee.

   b. BROKERAGE ACCOUNTS.

If you have an existing brokerage account, the process of transferring your securities in such account into the name of your revocable living trust is much easier. The reason is that the securities in the account are not titled in your individual name but are held in the "street name" of the brokerage company. Consequently, the only change that needs to be made is the name on the brokerage account itself. Each different brokerage company may require different documentation in order to accomplish this. Some require a copy of the Trust Agreement or a Short Form Trust and others will have you simply sign a statement which has been prepared by the brokerage company setting forth the powers of the trustee.

   c. PROFESSIONAL CORPORATION STOCK.

If you are a professional such as a doctor or a lawyer, and have incorporated your practice, under Hawaii law your stocks may be transferred into your revocable living trust provided that you reserve the power to revoke the trust, serve as the Trustee or co-Trustee or reserve the power to direct the Trustee, and are sole beneficiary of the Trust.

   d. STOCKS IN SUBCHAPTER S CORPORATION.

If you own stock in a corporation which has made a Subchapter S election, your trust must be a Qualified Subchapter S Trust (QSST) in order to qualify as an eligible shareholder and avoid the loss of the Subchapter S election. In order to qualify as a QSST, your trust must meet the following requirements:

(1) During the lifetime of the current income beneficiary, there can only be one income beneficiary of the trust;

(2) Any principal distributed during the life of the current income beneficiary must be distributed only to that beneficiary;

(3) The current income beneficiary's interest must terminate on the earlier of that beneficiary's death or the termination of the trust;

(4) If the trust were to terminate during the lifetime of the income beneficiary, the trust must distribute all of its assets to that beneficiary; and,

(5) The current income beneficiary must be a citizen or resident of the United States.

The above requirements must all be met during your lifetime as Settlor. When the stock is transferred into the name of your trust, your trust becomes a new shareholder and an election to treat your trust as a QSST must be filed.

   e. SECTION 1244 STOCK.

An individual can claim an ordinary loss deduction for income tax purposes (up to $50,000 per year on an individual return and $100,000 per year on a joint return) if the loss is sustained on the sale of Section 1244 stock issued by a small business corporation. A small business corporation is one in which the aggregate money or other property received by the corporation for its stock as a contribution to capital, and as paid in surplus, does not exceed $1,000,000. This ordinary loss deduction is limited to individuals. The Code specifically excludes a trust from qualifying. Stocks qualifying as Section 1244 stock should therefore not be transferred into a revocable living trust. The alternative is to register the stock with a "payable on death" designation to the trust. This will retain the income tax benefit and still avoid probate.

   f. STOCK OPTIONS.

An employee who receives an incentive stock option (ISO) is not taxed on the gain at the time of the grant or exercise of the option but recognizes gain when the stock received from exercising the option is disposed of, exchanged, or sold (Code 421 and 422). An ISO may be exercised only by the employee, the employee's estate, or a person inheriting the option. It cannot be exercised by the trustee of a revocable living trust. Also, if stock acquired by exercise of an ISO is disposed of within two years of the date the option was granted, or within one year of the date the stock was received, the result is the recognition of gain. Therefore, transfer of stock acquired pursuant to such an option to a revocable living trust during the lifetime of the employee may result in a taxable disposition for income tax purposes. Therefore, neither ISOs nor (during the requisite holding period) stock acquired through exercise of an ISO should be transferred to the trustee of a revocable living trust.

   g. SAVINGS BOND.

Series E, EE and H United States Savings Bonds can be transferred to a revocable living trust without causing the accrued interest to be taxed to the owner at the time of transfer (Ltr Rule 7907120, Rev. Rule 79-409, Ltr. Rule 7729003).

4.         INSTALLMENT OBLIGATION.

Neither the transfer of an installment obligation to a revocable living trust by the settlor, out of a revocable living trust back to the settlor, or to the beneficiaries of a revocable living trust at the settlor's death result is an acceleration of gain or taxable disposition. (Rev. Rule 74-613, 76-100; Code § 453B(c); Reg. 1.453-9; Code § 691(a)(4).)

5.         SOLE PROPRIETORSHIP.

If you own and operate a sole proprietorship, the transfer of your sole proprietorship into the name of your revocable living trust may be done by a general assignment. Your trust attorney should be able to help you with this. Additionally, it would be advisable to transfer individually titled accounts to the trust pursuant to the other instructions contained in this chapter.

6.         LIMITED PARTNERSHIP.

Before assigning a limited partnership interest into your revocable living trust, it is generally preferable to contact the general partner to determine if there is a form which the general partner requires. It is usually not necessary to make your trust a substituted limited partner but rather to just assign the beneficial interest in the limited partnership to your trust. This would be satisfactory if the only objective is to keep this interest out of probate at the time of your death. If, however, it is desired that the successor trustee, in the event of your incapacity, should have the same power and control over the limited partnership interest as you have as Settlor then it may be preferable to make the trust a substituted limited partner. Generally, this will require the consent of the general partners.

7.         SAVINGS AND CHECKING ACCOUNTS.

   a. Regular Passbook Savings.

In order to transfer a regular passbook savings account into your revocable living trust, all that is generally necessary is for you to contact your bank and request that they change the name on your account to the name of your trust. Most banks will do this for you and the account will continue with the same account number and there will be no loss of interest. Some banks, however, will require that you close an existing account and open a new account in the name of your trust. If this is the case, you may wish to close the existing account to coincide with the end of the calendar quarter in order to ensure that no interest income is lost on your account.

   b. Checking Account.

In order to transfer a checking account into your revocable living trust, it is necessary to contact your bank and provide them with either a copy of your Trust Agreement or a copy of your Short Form Trust.

   (1)        Individual Checking Account.

Where the account is individually owned, most banks will simply change the name on the account but allow you to keep the same account number. You may continue to use your existing checks and when they have run out, order new checks in the name of your trust. You do not need to put the name of your trust on your checks. It would be wise, however, to make some reference to your trust on your checks so that when you die, your survivors do not mistakenly believe that your checking account is not in your trust and begin probate proceedings only to find out later that your checking account is in fact in your trust. Some banks will require that an existing checking account be closed and a new checking account be opened. If you wish to give another person access to your account, you may do so by signing a power of attorney card with the bank.

 
   (2)        Joint Checking Account.

Where the checking account is held jointly with another, it will be necessary to close this checking account and open a new checking account in the name of your trust. A trust cannot be a joint owner of a joint checking account. If you are a co-Trustee with another and the Trust Agreement authorizes each trustee to delegate ministerial actions to the other then you can instruct the bank on the account signature card that checks signed by either of you (or both if you prefer) are to be accepted.

   c. Credit Union Account.

Generally a credit union account would be treated the same as a bank account. Some credit unions, however, refuse to place the account into a trust insisting that the account must be "individually" owned. If your credit union takes this position, or if transferring the account into your trust would result in the loss of credit union insurance coverage on the account, then an alternative would be to have your trust named as the "payable on death (POD) beneficiary" of your credit union account.

8.         CERTIFICATE OF DEPOSIT.

Before transferring a certificate of deposit into your revocable living trust, you should first contact your bank to determine its policy with respect to penalties and loss of interest. Some banks may require that the certificate of deposit be redeemed and a new one purchased in the name of your trust. If this is the case, you may wish to delay redeeming the certificate of deposit since it may result in a loss of interest and penalties. You may wish to wait until the certificate of deposit matures and then purchase a new certificate in the name of your trust.  The treatment of certificates of deposit differ among banks.  Some will simply change the name on the certificate of deposit to the name of your trust without any penalties or loss of interest.

9.         SAFE DEPOSIT BOX.

It is recommended that you place your safe deposit box into the name of your revocable living trust. The reason is so that if you become incapacitated or upon your death, the successor trustee would be able to have access to the box, and remove assets from it without having to obtain a court order. If the safe deposit box is in your individual name, the bank will generally allow the person named as personal representative under your Will or a next of kin to view the contents of the box and have it inventoried. Under these circumstances, the bank representative will inventory the contents of the box in the presence of the appropriate individual. If the safe deposit box is held in the name of your trust, then upon your death, the successor trustee of your trust should be able to take over control of the box and remove the contents after having established to the bank's satisfaction that you are dead (presenting a certified copy of your death certificate) and that he or she has authority as successor trustee (presenting a copy of your Trust Agreement or Short Form Trust) along with his or her own identification. There should be no need to have the bank participate in an inventory. It may be wise, however, for the Successor Trustee to ask the bank to participate in the inventory in order to protect the Successor Trustee from claims that he removed cash or jewelry without accounting for it.

10.       LIFE INSURANCE.

   a. Life Insurance Owned by Settlor Insuring Own Life.

Your revocable living trust should be designated as both the owner and the beneficiary of your life insurance policies. The ownership of your life insurance policies can be assigned to your trust on a form provided by the life insurance company. A separate form may be necessary to also make your trust a beneficiary of your life insurance.

The reason the ownership of each of your life insurance policies is assigned to your trust, is so that if you become incapacitated, the successor trustee of your trust would have the power to manage your life insurance policies, borrow the cash value of such policies, if necessary, for trust purposes, and otherwise exercise ownership over the policies.

The reason your trust is named beneficiary of your life insurance policies is so that upon your death, your life insurance proceeds will be paid into your trust and be distributed to the beneficiaries of your trust according to the terms of your trust.

The appropriate form for changing the ownership and beneficiary of your life insurance policies should be obtained from your life insurance company (or your insurance agent). It should be completed, and mailed back to your life insurance company. When you have received the endorsement from your life insurance company, you should attach it to your life insurance policy. The American Bankers Association, Trust Division, and the American Bar Association have prepared universal change of beneficiary forms which are acceptable to most insurance companies.

You should be aware that under Hawaii law (HRS § 431:10-232) in order for the proceeds of life insurance to avoid the claims of your creditors, your life insurance policies must be 'payable to a spouse .... or to a child, parent or other person dependent upon the insured...'. If your life insurance policies are payable to your trust, such policies may not be protected from the claims of your creditors particularly if they can be used for trust expenses. Accordingly, if significant creditors' claims may be a problem, perhaps your life insurance policies should not be assigned to and made payable to your trust. An alternative way of handling this problem would be to name your spouse as beneficiary and your revocable trust as alternate beneficiary. Your spouse would then have 9 months after your death in which to disclaim his or her right to the proceeds if there were no creditor problem. The proceeds would then be paid to your Trust as alternate beneficiary. If your spouse does not outlive you then the same plan could be put into effect with your children.

   b. Life Insurance Owned By Settlor Insuring Spouse's Life.

It is not wise to transfer ownership of insurance insuring a spouse's life into a trust in which that spouse is a present or future Trustee. While there are cases holding to the contrary, the Internal Revenue Service has taken the position that the Trustee has incidents of ownership even though held in a fiduciary capacity.

   c. Life Insurance Owned by Spouse on Settlor's Life.

Life insurance owned by your spouse on your life should not be made payable to your trust since your power to amend the trust and change the beneficiaries could be construed as an incident of ownership, thus causing inclusion of the proceeds in your taxable estate. It is best to transfer the ownership of the life insurance back to the insured. The insured/owner should then transfer the ownership to his or her revocable trust and designate his or her trust as beneficiary.

11.       REAL PROPERTY.

In order to transfer real property into your revocable living trust, it is necessary for your attorney to prepare a conveyance document (deed, assignment of lease, etc.). This conveyance document is then recorded at the Bureau of Conveyances. When real property is transferred into your trust, an Exemption From Conveyance Tax Certificate needs to be filed with the conveyance document. No conveyance tax is payable because the transfer to your trust is exempt from conveyance tax.

   a.  Leasehold Property.

If you own real property which is leasehold, the lease document should be examined to determine whether or not the lessor's consent is required. If the lessor under the lease is Bishop Estate, it will not consent to the conveyance unless your Assignment of Lease contains very specific language which it requires. Bishop Estate should be contacted for its current requirements.

   b. Property Encumbered By Mortgage.

If you own real property which is encumbered by a mortgage, the mortgage document should be examined to determine whether or not there is a "due on sale" clause. Most mortgage documents contain such a clause which provides that if the property is transferred without the lender's consent, the entire principal balance on the note secured by the mortgage can be called at the option of the lender. This clause is not applicable where the property is your principal residence and is being transferred into a revocable trust in which you are both the trustee and beneficiary. If the property does not comply with this limited exception, i.e. rental property, then the lender should be contacted and its consent obtained before the property is transferred into your trust. If the lender refuses to consent then your options are as follows:

(1)        Hold the Deed unrecorded until the mortgage is paid off or until your death.  At that time, the Deed could be recorded.  The risk here is that the Deed would somehow get lost in the shuffle and end up never getting recorded, thus resulting in the need for probate;

(2)        Go ahead and record the Deed without the mortgage company's consent.  The risk with this is that if the mortgage company later found out, they could accelerate the loan.  This would probably only be a disadvantage to you if the interest rate went up significantly higher than the interest rate you presently have with the mortgage company.

   c.  Out Of State Property.

If you own real property which is located in another state, it is advisable to retain the services of an attorney is that state to prepare the appropriate conveyance document to convey property into your trust and follow through with recording the conveyance document.

            Each state has its own specific requirements regarding what is to be included in the conveyance document in order for the property to be effectively transferred into your trust. It is possible to have a Hawaii attorney prepare a conveyance document to transfer this type of property and get it recorded in the state where the property is located, and not learn until after your death that the property was not effectively transferred into your trust because of some state requirement was not complied with.

   d. Hawaii Home Exemption.

The real property tax home exemption is still available to you even though you convey your home into your revocable living trust. If the name of your revocable trust clearly states that it is your trust, then it is generally not necessary to re-file a Claim for Home Exemption. However, if the name of your trust does not clearly indicate that it is your trust, then a Claim for Home Exemption should be re-filed with the Real Property Assessment Division of the Department of Finance located on the second floor of 842 Bethel Street, Honolulu, Hawaii. If the Claim for Home Exemption is filed by mail, two (2) copies should be included with a stamped, return addressed envelope so that one (1) copy can be returned to you for your files. You will need to also include a photocopy of your driver's license or other form of identification to establish your date of birth.

   e. Capital Gain Exclusion Upon Sale.

Transferring your personal residence into your revocable living trust does not affect your right to the $250,000 capital gains tax exclusion upon sale of your personal residence.

   f. Homeowner's Insurance.

It is generally recommended that when you transfer your real property into your revocable living trust you contact your insurance carrier to advise them of the change of ownership. Generally, your insurance carrier will provide you with a rider either naming you or your trust as an additional insured.

   g. Refinancing A Mortgage Note.

If, after you have transferred your real property into your revocable living trust, you wish to refinance the mortgage note on that property, it might be necessary for you to convey the property out of your trust and back into your individual name, refinance the mortgage, then convey the property out of your individual name and back into your trust. Whether or not this is required will depend upon the policy of the mortgage lender with whom you are refinancing.

If you own real property which is held by you and your spouse as tenants by the entirety, under Hawaii case law that property is not subject to the claims of either of your individual creditors but can only be attached by a creditor who is a creditor to both of you. If the tenancy by the entirety form of ownership is revoked by transferring your property one-half into each of your trusts then either of your individual or joint creditors would be able to claim the portion placed in that person's trust. Thus, transferring tenancy by the entirety property into your trusts may increase the exposure of your real property to some potential creditors' claim. The way this problem is managed might include:

(1)        If sufficient other assets are available to place at least the estate tax exemption amount worth of property into each of your trusts (each of husband' s and wife's trusts) then the real property held as tenancy by the entirety might be kept in the tenancy by the entirety form with a plan that after one of you dies (either husband or wife) the other one (the surviving spouse) would then convey that property into his or her own revocable living trust in order to avoid the probate of that property at his or her death. The risk here, however, is that if you and your spouse die in a joint accident, or if one of you dies and the other one is left incapacitated, or if one of you dies and the other one just never gets around to transferring the property into his or her trust, then this property will end up going through probate at the second death.

(2)        Convey your real property which is held as tenants by the entirety into each of your trusts (thus ending the tenancy by the entirety) and take out an umbrella liability insurance policy in the event of a claim which exceeds the value of your homeowner's liability insurance.

i. Step-Up In Income Tax Basis.

Under a Sixth Circuit Court ruling (M. Lee Gallenstein v. U.S., 9/16/93, CA-6; 1992 US App Lexis 22062), if real property held by a husband and wife either as tenants by the entirety or in joint tenancy, was purchased prior to 1977, and continues to be held as tenants by the entirety or joint tenancy until the death of the first of the husband and wife to die then, if the first to die was the one who provided all of the money toward the purchase of this property, it will take a full step-up in income tax basis at the death of the first to die rather than only a one-half step-up in income tax basis. If this property is taken out of the tenancy by the entirety or joint tenancy form of ownership and placed one-half into each of the husband's and wife's separate trusts, then upon the death of the spouse who provided all of the contribution, there will only be a one-half step-up in income tax basis. Accordingly, if highly appreciated property is held jointly by a husband and wife and was purchased with the entire contribution of one of them prior to 1977 then careful thought should be taken before this property is transferred into their revocable living trusts. The objectives which have to be balanced include:

(1) The need to fully fund the Exemption Trust of the first to die; and,

(2) The desire to obtain a double step-up in income tax basis for the property at the first death. This is particularly relevant if the surviving spouse plans to sell this property or if the tax laws change to eliminate the step-up in basis benefit.

12.       IRA OR QUALIFIED PENSION PLAN.

The decision by a married person as to whether to designate his spouse or his trust as the beneficiary of his IRA or Qualified Pension Plan requires a rather complex analysis.

For a Qualified Pension Plan, federal law requires that the spouse be named as the primary beneficiary unless the spouse signs a consent which is then filed with the trustee of the Plan. Assuming that the spouse is willing to sign such a consent, a determination must be made as to your specific objectives with regard to the Plan.

   a. Tax Deferral.

If your objective is to keep the money in the Plan as long as possible in order to defer income tax and thus have a tax-free build up, then you want the pay out period to be extended for your life expectancy plus that of a "designated beneficiary".  If there is no designated beneficiary then the Plan must be distributed within five years after your death.  Your revocable Trust can qualify as a designated beneficiary, but it must be carefully drafted with that purpose in mind.

   b. Control over Ultimate Distribution.

Another consideration is whether you wish to give complete control over your Plan to your surviving spouse after your death or continue to control the ultimate distribution of the Plan. If you wish to give complete control to your spouse, the solution is to simply name your spouse as the primary beneficiary. If you do not wish to give complete control to your spouse and the proceeds are not needed to fund the Exemption Trust, you can name the QTIP Marital Trust under your revocable living trust as the beneficiary.  The marital trust is an ideal beneficiary of the Plan because the Plan is a shrinking asset due to its built in income tax liability.

c.         If the benefits from the Plan are needed to fund your Exemption Trust, it may be advisable to have the Plan payable directly to the Exemption Trust. If this is done, a pecuniary marital trust formula should not be used. A fractional share marital trust formula should be used in order to avoid the premature recognition of income in respect of a decedent (IRD).

   d. Conclusion.

Generally, the approach we recommend is that you designate your spouse as the primary beneficiary of the Plan and then designate your revocable living trust as the secondary or alternate beneficiary. When you die, your spouse has nine months in which to decide whether or not to disclaim some or all of the Plan's benefits by filing a qualified disclaimer. Depending upon the life expectancy of your surviving spouse and whether or not there may be a need to fund your Exemption Trust, your surviving spouse may either accept the Plan's benefits and roll them over into his or her own IRA in order to continue deferring recognition of income or, alternatively, disclaim the benefits in which case they will be payable to your trust as secondary beneficiary. This route seems to work well in most situations. If, however, you have children by a former marriage who you wish to ultimately receive these benefits, or for some other reason you do not want to give complete control over these benefits to your spouse, you may then consider making the IRA or Pension Plan benefits payable to your Trust.

13.       COMMUNITY PROPERTY.

If you are married and have either moved to Hawaii from a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin) or own property in one of those states, it may be advisable to transfer this property into a separate community property trust rather than into your separate revocable living trusts. The objective here would be to continue the characterization of this property as community property so that upon the death of the first of you to die (either husband or wife), the entire property would take a full step-up in income tax basis rather than only a one-half step-up which would be the case if the community property character was severed through the transfer into your separate trusts.

Transfer of community property into your separate trusts and still preserving the community property character of this property may require either special language in your separate trusts or a separate trust designated as a "community property trust" which would then terminate and pour-over (much like a pour-over will) into your separate trusts after the death of the first of you to die.

The specific form that is used should be tailored to comply with the community property laws of the specific state in which the community property is located or from which you transferred your property when you moved to Hawaii. Retaining the services of an attorney in the state where the community property is located or was transferred is often advisable in order to determine the specific requirements of that state. After consultation with such attorney, a determination should also be made as to whether or not this property continues to be community property after you moved to Hawaii or, if it is located in the community property state, whether or not it was obtained before or after you moved to Hawaii. Generally, there will be two factual patterns:

a.         You and your spouse formerly lived in a community property state and owned community property in that state. You then moved to Hawaii. Some of the community property (stocks, cash, proceeds from the sale of your home) are brought with you and some of the property is left in the community property state (i.e. real property). All of it continues to be community property. The property located in the community property state continues to be community property under that state's law and the property that is brought to Hawaii continues to be community property under Hawaii law (HRS § 510). If you then use some of this community property, however, to purchase real property in Hawaii in a tenancy by the entirety form of ownership, the Internal Revenue Service, by a questionable revenue ruling (Rev. Rule 68-80), deems the community property characterization to have been severed and treats the real property purchased in Hawaii as no longer community property. The real and personal property remaining in the community property state, however, clearly continues to be community property provided that it is labeled as such.

b.         The next factual pattern would be if you and your spouse are domiciled in Hawaii but purchase real property in a community property state. If the property is labeled as community property in that state, then it will probably be treated as community property. This is not entirely clear and may depend upon the state law in that particular state.