Today, many people use a revocable living trust instead of a will, joint ownership, or beneficiary designation as the foundation of their estate plan. When properly prepared, a trust avoids the costly public, and often time-consuming, court processes of conservatorship or guardianship (due to incapacity) or probate (after death). Still, many people make one big mistake that sends their accounts and property—and their 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 the process of transferring ownership of your accounts and property from you as an individual to yourself as the trustee of your trust. Although the trust will technically own the accounts and property after the transfer, you will maintain control over them as the trustee. You will also continue to be able to benefit from those accounts and property as the primary beneficiary while you are living.
Funding a trust is accomplished in several different ways:
- Changing the title of your accounts and property from your individual name (or joint names if you are 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 ownership interest in nontitled property (such as artwork, jewelry, collectibles, or antiques) to your trust through an Assignment of Personal Property
- Assigning your ownership interests in a limited liability company or other business entity by executing the right paperwork, such as an Assignment of Membership Interest, Stock Transfer Agreement, or a similar document, depending on the type of ownership and applicable state law
- Changing the primary or contingent beneficiary of an account or property to your trust
What Happens to Accounts and Property 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. You may believe that once you sign your trust agreement, you are done. However, if you then fail to change titles and beneficiary designations for your accounts and property before becoming incapacitated or dying, those accounts and property—and your loved ones—may end up in probate court.
Which Accounts and Property Should (and Should Not) Be Funded into Your Trust?
In general (but with some exceptions), you should consider funding the following into your trust:
- Real estate (homes, rental properties, vacant land, and timeshares)
- Bank and credit union accounts (checking, savings, CDs, money market accounts)
- Safe deposit boxes
- Investment accounts (brokerage, agency, custody)
- Notes payable to you
- Business interests (limited liability companies, corporations, partnerships)
- Intellectual property
- Oil and gas interests
- Water rights or shares (especially in some states where they can be quite valuable)
- Personal effects (artwork, jewelry, collectibles, antiques)
- Collector cars
- Digital accounts and cryptocurrency (if possible)
- 529 plans (Note that some plan administrators do not permit the transfer of existing 529 plans to a trust but may permit opening a new 529 plan in the trust’s name. If transferring the account to the trust is not an option, be sure to designate a successor custodian to take over if the primary custodian becomes incapacitated or dies.)
You should avoid funding certain assets into your trust during your lifetime, but you may want to consider funding them into your trust upon your death by beneficiary designation, including the following:
- Life insurance policies
- Individual retirement accounts, 401(k)s, and other tax-deferred retirement accounts
Last, you probably should not, or may not be able to, fund the following into your trust during your life or at your death:
- Interests in professional corporations
- Foreign accounts or property: In some cases, funding non-US accounts or property into a US-based trust can cause adverse tax consequences. In other cases, trusts (even US trusts) are not recognized or are ignored due to the other country’s own laws.
- Uniform Transfers to Minor Act (UTMA) and Uniform Gifts to Minor Act (UGMA) accounts: Your minor child is the owner of the account, and you (as the person who set up the account) are merely the custodian. Name a successor custodian in case you become incapacitated or pass away to ensure continuity of management without changing ownership.
- Everyday automobiles and other low-value vehicles: Many states have a process for transferring a vehicle outside of probate without funding them into a trust.
While these recommendations should serve as basic guidelines, it is important to remember that there are no hard-and-fast rules with trust funding. Work closely with us to determine what should go into your trust and what should stay out. Also, when acquiring new accounts or property, call us to find out how to title the account or property or whom 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 trustee, instead of a conservator or guardian selected by a judge in a public court proceeding, will take control of your accounts and property if you become unable to handle your financial affairs, ensuring that you are cared for in the manner you expect, by the person you selected, and according to the instructions you have included in the trust.
- Your trustee will take control of the trust’s accounts and property after your death, managing and distributing them to your chosen beneficiaries when and how you have determined, without probate court involvement.
- Because your trust governs all the accounts and property it owns (or that will transfer into it by beneficiary designation upon your death), you only need to update the trust agreement as your wishes and circumstances change. This comprehensive approach will be much easier than managing an estate plan built piecemeal with probate-avoidance tactics such as joint ownership, payable-on-death or transfer-on-death accounts, and individual beneficiary designations.
- Under most circumstances, your trust does not need to be filed with the probate court unless it is contested, allowing details of your accounts and property and your final wishes to remain private. In contrast, any accounts or property not held in a trust, that are not jointly owned, and that do not have a designated beneficiary will, in most cases, need to go through probate, a court process where all your private details are made a part of the public court records and are accessible to anyone.
The Bottom Line on Trust Funding
Many people appreciate the cost and time savings as well as the added control over their money and property that a trust offers. Yet in the end, an unfunded trust is not worth the paper it is 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.
