You can transfer securities into your living trust, but you must be mindful of state and federal laws as well as any requirements of the stock or bond issuer.
Moving Stocks or Bonds to a Trust
To put stocks or bonds that you hold into a trust, you typically use a document called a “securities assignment” (sometimes called a "stock power"). This document asks the securities’ “transfer agent” for permission to transfer the securities to your trust. The transfer agent is the person or company that is responsible for keeping track of the securities issued by a corporation or government. Contact your securities’ transfer agent for details about what it will need to receive.
If the security is publicly traded—bought and sold to the general public through a stock exchange, like the New York Stock Exchange—the stockholder's signature has to be “guaranteed” by a commercial bank or stock brokerage firm. This is similar to having a signature notarized.
If you plan on transferring U.S. Savings Bonds, you need to use government form FS Form 1851 to ensure that the bonds are not considered to have been "cashed in" when transferred to the trust. That way, you won't have to report any income from the bonds on your federal taxes. The form is complicated, so it's a good idea to consult an attorney or a financial advisor for help.
Moving Brokerage Accounts and Mutual Funds to a Trust
Most people hold their stocks, bonds, and other securities in brokerage accounts—that is, a stockbroker holds your stock certificates and sends you periodic statements of account. If this applies to you, you will need to contact the brokerage firm for instructions on transferring your account to a trust. Each brokerage firm will have its own specific requirements for this process, and many will offer forms you can fill out. The firm will likely require documentation of the trustee's powers to deal with securities—and will ask for either a copy of your trust document or an abbreviated document called a "certification of trust."
The process for transferring mutual funds to your trust is similar; get in touch with the company for its specific requirements, and be prepared to show a copy of your trust document or a certification of trust.
ISOP Stock Options
A "qualified incentive stock option plan" ("ISOP") is an employee stock option plan that gives both the employer and the employee-stockholder certain tax benefits as long as certain conditions are met, such as not selling the stock within two years after the employee exercises the option (the "anti-disposition" rule).
Unexercised ISOPs should not be transferred to a living trust. Instead, you should designate the trustee as the person authorized to exercise the options in the event of your death. But, you have to make sure that the trustee is instructed not to sell the stock within two years after the options were first granted to you or within one year after the trustee exercised them.
Closely Held Stock
A closely held corporation is one in which most of the stock is held by just a few stockholders, often family members. You may face a challenge if:
- you want to transfer the stock of a closely held corporation to your living trust
- within the past 10 years the corporation redeemed (bought back) stock from a shareholder, and
- that same shareholder is one of the beneficiaries of your trust.
The beneficiary whose stock was redeemed probably entered into a "10-year agreement" for tax purposes, and so re-acquisition of the stock other than "by bequest or inheritance" is prohibited. If this is the case, you'll have to transfer your closely held stock through your will.
An Alternative: Transfer-on-Death Securities
Nearly every state in the U.S. has adopted a law based on the Uniform Transfer-on-Death Securities Registration Act, which allows you to register your securities in a way that states who should inherit them upon your death. Read more about the transfer-on-death option for securities.
A Lawyer Can Help
Transferring stocks and bonds into a living trust can be tricky. For instructions specific to your situation and your securities, get help from a qualified financial planner or estate planning attorney. Examples of questions you might ask your attorney include:
- Can I transfer stock to my living trust myself?
- Should I exercise my ISOP before I transfer stock to my trust?
- Does the corporation that issued stock to me have to agree to my trust?