Today many people are using a revocable living trust as the foundation of their estate plan. However, they make a big mistake that sends their assets and loved ones right into the court system: they fail to fund their trust. But how do you fund your trust?
When carefully prepared, a living trust avoids the public, costly, and time-consuming probate court process. Probate is several months to years long and is a process in which a judge determines how to distribute your assets. It is a public process that opens your estate up to prying eyes and possible predatory claims. A trust can also help you plan for who will make decisions for you if you become unable to make your own decisions.
Avoiding probate is a worthy goal. So is planning for if you need help making decisions one day. Learn how to fund your trust so that it is a useful and helpful estate planning tool.
What Does it Mean to Fund Your Trust?
Funding a trust is simply the process of transferring assets from your name into your trust. It would help if you also changed most beneficiary designations to your trust.
You can fund your trust in several different ways:
- Change the asset’s title from your 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 December 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 to your trust.
What Happens to Assets Left Out of Your Trust?
Many people avoid probate by setting 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 Fund 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
Don’t Fund Trust with These Assets
- IRAs and tax-deferred retirement accounts. You only need to change the beneficiary.
- 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, the government does not recognize trusts 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 number of assets, including vehicles, to pass outside of probate. In others, you can designate a beneficiary for cars. In some states, cars don’t have to go through probate at all
What Are the Benefits of Funding Your Trust?
Funding your trust makes it possible to obtain the best results from your trust-based estate plan:
- The person you designate will take control of your trust assets if you become mentally incompetent. This trustee is a person you have selected to make your decisions if you become unable to care for yourself. Using a living trust to designate people to care for you is a much better way to plan for the unexpected. Without naming someone, you could end up instead under a conservatorship or guardianship placed by a judge.
- Instead of a probate judge, your settlement trustee will take control of your trust assets after your death.
- Your trust will be easier to update as your wishes and circumstances change. Without a living trust, you would do things piecemeal through joint ownership, payable on death, transfer on death accounts, or individual beneficiary designations.
- Final wishes will remain a private family matter instead of being publicized in the local probate court records.
- Incapacity or settlement trustee will have direct access to your trust assets without the need for obtaining a court order.
- Incapacity or settlement trustee will be able to manage, invest, sell and reinvest your trust assets without court intervention.
Help Funding Your Trust
Many people like the cost and time savings that a living trust offers. The added control over assets is another plus. Yet, in the end, an unfunded trust isn’t worth the paper it’s written on.
It’s essential to work closely with your attorney to determine what should go into your trust and what should stay out. Before purchasing new assets, consult with your attorney to determine how to title the account or deed or who to designate as the beneficiary.
Our estate planning attorneys are available to answer questions about funding your trust and look forward to working with you and your advisors on all of your estate planning needs.