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Funding Your Living Trust

April 2, 2015 Douglas Davis

Revocable living trusts are a popular estate planning tool these days, but unless they are funded with assets, they are essentially useless.

Think of a revocable trust as a container, and on top of that container, there are instructions on how to manage and distribute every asset inside. If the container is properly prepared, the instructions are clearly written and the assets are placed inside, it can help your family avoid costly and time-consuming probate upon your death and ensure your wishes are carried out if you are incapacitated or deceased.

A trust can:

  • provide for your spouse without disinheriting your children (which can be important in second marriages)
  • provide asset protection for children and grandchildren from the courts, creditors, spouses, divorce proceedings, and irresponsible spending
  • ensure that maximum credits are available against any potential estate tax on your estate

But a trust can only do these things if the container is filled with your assets. Ensuring that assets and accounts have the appropriate title or beneficiary is critical or else those assets could end up in court. Only you can make the decisions about what does and does not get put into the trust container.

How do I fund my trust?

To put assets into your trust, you must physically retitle them so that the trust actually owns them. This sounds complicated, but in most cases it’s just a matter of simple paperwork. For some types of assets like tangible personal property, a short assignment document will be used. Others will require written instructions from you on change of ownership or change of beneficiary forms. Some institutions will want to see proof that your trust exists, and in this case your attorney will prepare a certificate of trust. This is a shortened version of your trust that verifies your trust’s existence, explains the powers given to the trustee and who the trustee is without revealing any information about your assets, your beneficiaries and their inheritances.

When retitling assets for your trust, if you are single, the items to be placed in your trust will change from your name to the name of your individual trust. If you are married, your joint assets will be retitled to your joint trust. For instance, if the name of your trust is “The John Doe Trust,” you would retitle your asset to “John Doe, Trustee of the John Doe Trust.”

In addition to retitling assets, you will also need to change the beneficiary on some of your accounts to your trust. This is done for items such as IRAs, which should be left in an individual’s name, but upon death could become an asset within the trust.

For items that are not titled and therefore cannot be placed into the trust or for items that may have been left out of the trust, your attorney will prepare a “pour over will” and a “durable financial power of attorney.”  Both of these documents act like a safety net. When you die, the will “catches” any forgotten asset, provides instructions for getting it through probate, and then sends it to your trust.  If you are incapacitated, your durable financial power of attorney also acts as a safety net and will enable your designated agent to manage the assets as you wish.

Who Manages My Trust?

The trustee you name will control the assets in your trust. You can name yourself as the trustee, which ensures that you will have complete control. But in case you are incapacitated or deceased, you will also need to name a successor trustee to manage the trust. Throughout your life, you can continue to buy, sell or gift your assets within the trust, just as you do now. When an asset in the trust is sold or gifted, the instructions for the trust are updated, and the proceeds from any sale can still be funneled back to you. You can also amend the instructions to your trust and add assets to your trust container should you ever decide to do so.

Because there are several legal considerations regarding what should and should not go into a trust and because the instructions for the assets within a trust need to be very specific to avoid probate, it is best to have an attorney work through each asset and the instructions with you. They can also assist in getting assets retitled and beneficiaries updated.

In our next blog we will discuss what kind of assets should and should not be included in a living trust.