(This is part 4 in a 4-part series).
Today many people are using a revocable living trust instead of a will or joint ownership as the foundation of their estate plan. When properly prepared, a revocable living trust avoids the public, costly and time-consuming court processes of conservatorship or guardianship (due to incapacity) or probate (after death). Still, many people make a big mistake that sends their assets and loved ones right into the court system: they fail to fund their trust.
What Does it Mean to Fund Your Trust?
Funding a trust is simply the process of transferring assets from your name into your trust. 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 Jane Smith to Jane Smith, Trustee of the Jane Smith Living Trust dated January 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. Think life insurance, retirement accounts (but typically only with a Standalone Retirement Trust), and annuities.
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
On the other hand, you will probably not want to fund the following assets into your trust:
- IRAs and other tax-deferred retirement accounts – only the beneficiary should be changed if you’re putting in place a Standalone Retirement Trust
- Incentive stock options and Section 1244 stock
- Interests in professional corporations
- 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
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.
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:
- Your incapacity trustee instead of a conservatorship or guardianship judge will take control of your trust assets if you become mentally incompetent.
- Your death trustee instead of a probate judge will take control of your trust assets after your death.
- 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.
- 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.
The Bottom Line on Trust Funding
Many people like the cost and time savings, plus the added control over assets a revocable living trust offers. Yet in the end an unfunded trust isn’t worth the paper it’s written on. We are available to answer your questions about funding your trust and look forward to working with you and your advisors on all of your estate planning needs. Contact our office today at 646.736.7539 or via the submission box below.
Click below for the other parts in this series: