A well-designed trust is the cornerstone of many estate plans. In earlier posts we discussed What a Trust Is and the benefits of Revocable Living Trusts and Irrevocable Living Trusts. Now, we’re going to learn a little about putting the “fund” in “trust fund.” A oft-repeated phrase in the Estate Planning world is “an unfunded trust isn’t worth the paper it’s written on.” That really is the long and the short of it. You can design the craftiest and most elegant trust, a set of glimmering documents that would make even Warren Buffett proud, but without actually putting your assets inside the trust, it’s just a sexy stack of recyclables.
Funding Your Trust
“Funding the trust” means making the trust the legal owner of the assets. At that point, you will no longer be the owner of the assets. The trust will be the owner and the trustee will make decisions based on the guidelines established in the trust. Don't get riled up just yet, it's still your trust. And, the whole point of a trust is to benefit you and your family. In that vein, many people choose to serve as trustee of their own trusts. However, some people choose to name a spouse, child, or friend as trustee or co-trustee. If you are the only trustee, you should name a successor trustee to serve at the time of your death. Funding the trust is a vital step in the process. Any assets not in the trust at the time of your death will not be protected. Be careful, many people make that big mistake that sends their assets and family members right into the court system.
While transferring assets from your name into your trust is the first step in the funding process, you should also change most beneficiary designations to your trust. Funding is accomplished in several different ways:
- Changing the title of the asset from your individual name (or joint names if you’re married) to the name of your trust – for example, from Malcolm Reynolds to Malcolm Reynolds, Trustee of the Malcolm Reynolds Living Trust dated June 1, 2016.
- Assigning your interest in an asset without a title (such as artwork, jewelry, collectibles or antiques) to your trust.
- Changing the primary or contingent beneficiary of the asset to your trust.
What Happens to Assets Left Out of Your Trust?
For many people avoiding conservatorship or guardianship and probate are the main reasons they set up a revocable living trust. Unfortunately, you may believe that once you sign your trust agreement, you’re done. But if you fail to take the next step to change titles and beneficiary designations and then become mentally incompetent or die, your assets and loved ones will end up in probate court.
Which Assets Should, and Should Not, Be Funded Into Your Trust?
In general, you will probably want to fund the following assets into your trust:
- Real estate – homes, rental properties, vacant land and timeshares
- Bank and credit union accounts – checking, savings, CDs
- Safe deposit boxes
- Investment accounts – brokerage, agency, custody
- Notes payable to you
- Life insurance – if you don’t have an irrevocable life insurance trust
- Business interests
- Intellectual property
- Oil and gas interests
- Personal effects – artwork, jewelry, collectibles, antiques
Conversely, you may want to reconsider funding the following assets into your trust:
- IRAs and other tax-deferred retirement accounts – only the beneficiary should be changed
- Incentive stock options and Section 1244 stock
- Interests in professional corporations
- Foreign assets – in some countries funding an asset into a U.S.-based trust may lead to adverse tax consequences, while in other countries trusts aren’t recognized or are ignored due to forced heirship laws
- UTMA and UGMA accounts – your minor grandchild is the owner, not you as the custodian; instead, name a successor custodian
- Cars, trucks boats, motorcycles and scooters –most states allow a small amount of assets, including vehicles, to pass outside of probate, in others a beneficiary can be designated for vehicles, and in others, vehicles don’t have to go through probate at all
It’s important to work closely with your attorney to determine what should go into your trust and what should stay out. Also, before purchasing new assets, consult with your attorney to find out how to title the account or deed or who to designate as the beneficiary.
Benefits of Trust Funding
A properly funded trust makes it possible to obtain the best results from your trust-based estate plan, including:
- Your personally designated incapacity trustee will take control of your trust assets if you become mentally incompetent, instead of a conservatorship or guardianship judge.
- Your personally designated settlement trustee will take control of your trust assets after your death, instead of a probate judge.
- Your trust provides an easier method to modify your estate plan as your wishes and circumstances evolve, instead of relying on a piecemeal approach through joint ownership, payable on death or transfer on death accounts, or individual beneficiary designations.
- Your final wishes will remain a private family matter rather than being publicized in the local probate court records.
- Your incapacity or settlement trustee will have direct access to your trust assets without the need for obtaining a court order.
- Your incapacity or settlement trustee will be able to manage, invest, sell and reinvest your trust assets without court intervention.
Still Have Questions? We Can Help.
A trust can provide immense value to families of all economic circumstances. However, as we discussed earlier, the substantial benefits a trust offers are practically worthless if the trust is not properly funded. To learn more about trust funding and more Click Here to schedule your Virtual Estate Strategy Session with me (if you're not ready to talk but want more information, sign up for my Estate Planning Essentials Webinar). Choose a day and time that works best for you, we'll send you an intake form, I'll contact you either by secure video portal or telephone, I provide a comprehensive overview of your options as well as answers to all your questions, then you choose the plan that works best for you. When it’s time to sign the documents we send the completed plan directly to your home or place of business, we review the plan together for accuracy, and then we make notaries and witnesses available at the location of your choosing to execute the plan. Easy peasy! As an added benefit, members of our Estate Maintenance Program have 24/7 access to their entire executed plan through our secure client portal, accessible through any device.