A “trust” is created when you (the “settlor“), transfer ownership of certain property or assets to a “trustee.” The trustee, in turn, holds the property for the benefit of a third party (the “beneficiary“), that you named.

One of main types of trusts is a living trust” (or “inter vivos” trust), which is made while you are alive and usually gives you some power or control over the income made by the trust.

For living trusts, you need to be careful of how to transfer or place the desired assets into the trust, and this is especially true when the trust will hold “securities,” such as:

  • Stock in a corporation, which represents the stockholder’s ownership interest in the corporation, or
  • Bonds, which generally are a promise to repay a certain sum of money, plus interest, after a certain period of time. Bonds are usually issued by a government, such as the federal government (“treasury bonds”)

You need to check various state and federal laws, as well as any documents from the corporation or government that issued the securities, because they effect if, when, and how securities can be placed into a trust. It might be best to consult an attorney who is experienced in estate planning if you have any questions about transferring stocks or bonds to a trust.

Moving Stocks or Bonds to the Trust

There are different ways to transfer securities, depending upon whether they are held by you or by your securities broker, or if you’ve invested in a mutual fund.

A stock or bond certificate must be assigned through a securities assignment (sometimes called a “stock power”), which must be sent to the transfer agent – a person or company that is responsible for keeping track of the securities issued by a corporation or government – along with the certificate. 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. Such a guarantee is similar to having the signature “notarized.”

The transfer of brokerage accounts – that is, an account in which your stockbroker holds the stock certificates and sends you periodic statements of account – is handled by sending a request letter to your brokerage firm. The firm will require documentation of the trustee’s powers to deal with securities. The house rules of the particular brokerage firm govern the type of documentation required.

Similarly, most mutual funds firms require your guaranteed signature on a letter requesting change of ownership designation.

If you plan on transferring U.S. Savings Bonds, you need to use a special form so 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.

Special Rules for Some “Stock Options”

A “qualified incentive stock option” (“ISOP“) is an employee stock option that gives both the employer and the employee-stockholder certain tax benefits so long as certain conditions are met, such as not selling the stock within two years after the employee exercises the option and got the stock (the “anti-disposition” rule).

Unexercised ISOPs should not be transferred to the 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.

Transfer of ISOP stock to a revocable trust – a trust that you, as settlor, can change or cancel at any time – should not violate the anti-disposition rules. Nonetheless, if at the time of transfer, less than one year has passed since you acquired the stock, be sure that trust tells the trustee not to dispose of the stock until after one year has passed from the date you acquired the stock.

“Closely-Held” Stock

A “closely-held” corporation in one in which the stock is publicly traded, but it’s all held by a few stockholders, like family members. If you want to transfer such stock to your living trust, and within the past 10 years the corporation redeemed – that is, bought back – stock from a shareholder, and that same shareholder is one of the beneficiaries of your trust, you need more information before making the transfer.

The beneficiary whose stock was redeemed probably entered into a “10-year agreement” for certain 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 dispose of your closely-held stock through your will.

Questions for Your Attorney

Who should I name as trustee of my trust?

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?