The Importance of Trust Funding

Many of our clients choose to create an estate plan that includes a Revocable Living Trust. They choose a trust rather than relying on a will, beneficiary designations or joint ownership as part of their estate plan because they want the cost and time savings and privacy that a trust will provide their families upon their incapacity or death. However, if a trust is not funded it essentially is a set of very expensive papers and nothing more. This week I’m going to share why it is important to make sure your trust is funded and why you should regularly review your assets to make sure everything is included in your trust. 

Why Choose a Trust

First let’s take a step back and look at why you may use a trust in your estate plan. Whether your estate plan should include a Revocable Living Trust depends on your specific assets, needs and goals. Some of the most common reasons to use a trust are the desire to avoid the probate process, planning for incapacity, tax planning, flexibility and privacy. This is why our first meeting with potential clients is a Discovery Session so that we can take a look at your assets and goals and determine the best plan for you and your family.

What is Trust Funding

If your estate plan includes a Revocable Living Trust it is important to ensure that you have funded your trust. Funding a trust is the process of transferring assets from your ownership to the trust. This often involves changing the title of assets from your name to the name of your trust. When you sign your Revocable Living Trust documents your attorney may also have prepared a new deed for your home to transfer it into the trust and may have you sign an Assignment of Personal Property to transfer all of your personal assets (artwork, jewelry, books and other household items) that don’t have title into your trust. 

Trust funding isn’t difficult but it can be time consuming. For example, to change the title of your bank accounts you will need to make an appointment at the bank and provide a copy of your Certificate of Trust. Many other funding activities can often be completed online. It is important to have an accurate list of all your assets to make sure that everything is properly retitled into the name of the trust. 

You may not be able to transfer all assets to your trust. For example, retirement accounts cannot be owned by a trust while you are living. However, you may need to update your beneficiary designations to name your trust depending on your beneficiaries and how you are distributing your assets upon your death.

The Importance of Trust Funding

If you don’t fund your trust you’ve rendered it ineffective. Your trustees won’t be able to control your assets upon your incapacity or death, your distributions to beneficiaries may not be followed, your family will need to open a probate proceeding and you or your beneficiaries may be subject to guardianship of property. More on each of these below.

Ensure that the trust assets can be controlled by your named trustee

All the assets included in your trust can be controlled by the trustees of the trust. Initially that is you, the grantor(s) (the people who created the trust), and possibly a spouse if a couple creates individual trusts. If the initial trustees are unable to manage the trust assets whether due to incapacity or death then the successor trustee steps in. A successor trustee is an individual named as a back-up for the initial trustees and has the ability to control the assets in the trust. For example, if the initial trustees are incapacitated a successor trust can step in and manage monthly bills paid from the bank account titled in the name of the trust. Upon the passing of the grantors the successor trustee is able to manage, sell and distribute assets in accordance with the terms of the trust without seeking additional authority from the court. 

Go to the Correct Beneficiary

In your Revocable Living Trust you direct who should receive your assets, in what manner, and when. However the trust agreement only controls those assets that are titled in the name of the trust. So if you have determined that your children should receive their inheritance in Lifetime Asset Protection Trusts but fail to fund the trust then there is a chance that not all of your assets will be used to fund the trusts for your children. To reduce the risk of this happening your estate plan will likely include a Pour-Over Will which will direct your personal representative to fund all probate assets into your trust and follow the terms of the trust or to incorporate the terms of the trust into your will. However this only applies to probate assets and does not include assets that pass outside of probate such as life insurance and retirement accounts.

Avoid Probate

Avoiding the probate process is one of the most common reasons our clients choose an estate plan that includes a Revocable Living Trust. They often want to avoid the timing and cost of probate and aim to make things easy for their families when they’ve passed away. However, if they fail to fund their trust their family will still need to go through probate to transfer their assets. Any assets that don’t have beneficiary designations and aren’t properly funded into your trust will be subject to probate.

Guardian of Property

A guardian of property can become necessary in two situations 1) if minors are named as beneficiaries and 2) if the grantors become incapacitated. A guardian of property is an individual appointed to oversee the management of assets for a minor until they reach the age of 18 or an individual who has been found unable to manage their own property due to incapacity. 

Keeping Your Trust Assets Updated

Once you’ve completed the initial funding of your trust you’ll want to make sure that any new assets are titled in the name of your trust so that those assets aren’t subject to any of the issues discussed above. When you purchase a new property or life insurance policy or open a new retirement account it is important to double check with your attorney to make sure those assets are titled properly and beneficiary designations are aligned with your estate plan.

If you have a trust and need assistance with reviewing your trust assets and funding your trust or you want to talk more about if a trust is right for you and your family, schedule a free 15 minute consultation and we’d be happy to help.