Many people choose to prepare a revocable living trust as the basis of their estate plan rather than joint ownership or a will because when it is properly prepared it avoids the public, costly and time-consuming court process called probate.
Probate is the court process that happens after someone dies, to enact the wishes of their will (or the state law, if a will is not provided). This process can take years, depending on the complexity, and is public record. A trust, on the other hand, avoids this process, but only if the trust is actually funded with the appropriate assets. When people fail to properly fund their trust, their assets end up going through the court process anyway, dragging their family along with it.
Trust Funding 101
To fund a trust, you must transfer accounts and property out of your name and into the name of your trust. For some accounts and in some cases, you will want to name the trust as your beneficiary. If you have any accounts or property that require an individual beneficiary designation, an experienced estate planning attorney can walk you through the best way to transfer these outside of the probate process.
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 John Smith to John Smith, Trustee of the John Smith Living Trust dated June 1, 2020.
- 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 (i.e., account or property) to your trust.
What Happens to Assets Left Out of Your Trust?
For many people, avoiding a conservatorship or guardianship during their lifetime and probate at their death 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 before becoming mentally incompetent or dying, your accounts and property—and your loved ones—will end up in probate court.
Assets That Should and Should Not Fund Your Trust
These are assets you should discuss with your attorney and consider placing 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
- Business interests
- Intellectual property
- Oil and gas interests
- Personal effects – artwork, jewelry, collectibles, antiques
On the other hand, you should probably not fund 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 causes 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, you are merely the custodian; instead, name a successor custodian
It is important to work closely with a qualified estate attorney to determine what should go into your trust and what should stay outside of it. You may also want to contact your attorney before purchasing a new asset to determine the best way to title the account or deed and beneficiary.
Benefits of Funding Your Trust
The funding of your trust is what makes the whole plan and device function. Here are just a few of those benefits:
- Your trustee, instead of a conservatorship or guardianship judge, will take control of your trust assets on your behalf (if you become mentally incompetent) ensuring that you are cared for in the manner you expect.
- Your trustee, instead of a probate court, will take control of your trust assets after your death, managing and distributing the accounts and property to your chosen beneficiaries without court involvement.
- Your trust will be easier to update as your wishes and circumstances change instead of doing things piecemeal through joint ownership, payable-on-death or transfer-on-death accounts, or individual beneficiary designations.
- Your final wishes will remain a private family matter instead of being publicized in the local probate court records.
The Bottom Line on Trust Funding
Many people like the cost and time savings, as well as the added control over their money and property a living trust offers. Yet in the end, an unfunded trust isn’t worth the paper it’s written on. If you’re ready to create and fund a trust, or if you have a trust you know isn’t properly funded, contact Davis Law Group. Our team of experienced estate planning attorneys can review your plan with you to ensure your wishes are carried out in the best way possible.