It is essential to fund a trust after it has been created.
Have you ever purchased a product with packaging indicating "batteries not included"?
If yes, you have had to take additional steps to buy and install working batteries for it to function according to its design.
Trusts function similarly.
While revocable living trusts are powerful and effective estate planning tools for managing assets during life and efficiently distributing them after death, they only work if you fund the trust.
According to The American College of Trust and Estate Counsel, many people fail to fund their trust after creating it.
Neglecting trust funding can derail your estate plan and lead to otherwise avoidable probate proceedings, disputes, and taxes.
Yikes!
Unless you fund a trust after it has been created, it will not be able to distribute assets to your heirs.
Trust funding requires people to transfer ownership from their names to the name of the trust.
Doing so grants legal control of assets to the trust so they will be managed and distributed outside of probate according to the trust terms.
Failing to fund a trust means the assets will be subject to probate, and the trust you created would be a powerless entity.
What types of assets can be transferred to a trust?
Assets like bank and investment accounts, real estate property, intellectual property, business interests, and tangible personal property like artwork, collectibles, or jewelry can all benefit through being transferred to a trust.
You can name your trust as the beneficiary if you have a life insurance policy.
When you fund a trust with these assets, they can be efficiently managed while you are alive and easily distributed when you die.
When you do not fund a trust, it cannot work.
Any assets left out of a trust can be subject to probate.
Probate can take a long time and be expensive.
Your heirs will not receive their inheritances as quickly, and the risk of disputes among family members increases.
What are other benefits to a properly funded trust?
Privacy.
With a last will and testament, your wishes will be available to the public due to probate court proceedings.
Trusts can protect your privacy, assets, wishes, and heirs.
Control.
With a trust, you have more control over asset management and distribution specifics.
You can also avoid interference from courts.
Continuity.
When you fund a trust, your successor trustee can step in immediately to manage your assets if you become incapacitated without having to wait for an appointment by a court.
Trust funding requires ownership documentation to be updated to reflect the trust ownership.
Different assets have distinct requirements for these transfers.
Real Estate
Transferring real estate requires the execution of a deed to transfer ownership to the trust.
You must record the new deed with your local land records office.
Work with your experienced estate planning attorney to ensure your transfer meets all state laws and does not trigger taxes or other complications.
Bank and Investment Accounts
To retitle accounts to a trust, you will likely be required to provide documentation to the financial institution or bank.
They may have their own forms to complete and require you to provide a copy of your trust agreement.
Unless you update the ownership of your account, it will not be subject to control of the trust.
Tangible Personal Property
To transfer tangible personal property, you can use a written assignment.
The written assignment lists items like art, jewelry, and heirlooms to be transferred to the trust and formally declares they are to be managed and distributed by the trust.
Life Insurance and Retirement Accounts
While you should not retitle 401(k)s or IRAs to a trust to avoid immediate tax issues or other complications, it can be beneficial to list a trust as the beneficiary of these accounts.
Making your trust the beneficiary allows you to fund a trust with the proceeds of the account after your death.
Business Interests
For those who own a business, transferring interests or shares to your trust can be helpful.
To complete the transfer, you must amend operating agreements, partnership documents, or stock certificates.
People can easily make mistakes when they fund a trust.
What are common mistakes made in trust funding?
Leaving assets out of the trust.
The most common issue is leaving important assets out of the trust, rendering it ineffective.
Failing to update beneficiary designations.
When the terms of the trust and beneficiary designations do not align, estate battles can be triggered.
Not reviewing the trust regularly.
People tend to acquire and sell assets over time.
It is essential to review your trusts and include new property.
Your estate planning attorney can provide guidance to help you fund your trust appropriately.
Your trust requires continuous attention to align with your goals and manage your current assets.
You can avoid legal issues by properly funding a trust and efficiently and privately providing for your loved ones.
Trusts without assets to manage and distribute are ineffective.
If you want to fund a trust with retirement accounts or life insurance proceeds, you must make the trust the beneficiary.
You should periodically and regularly review your assets and trust terms to ensure they are in order and align with your current circumstances and goals.
An experienced estate planning attorney should create your trust to ensure it is set up to meet legal requirements.
This post is for informational purposes only and does not provide legal advice. You should contact an attorney for advice concerning any particular issue or problem. Nothing herein creates an attorney-client relationship between Harvest Law KC and the reader.
References: American College of Trust and Estate Counsel (ACTEC) (Aug. 31, 2023) "Funding Your Revocable Trust and Other Critical Steps" and American College of Trust and Estate Counsel (ACTEC) (Sep 21, 2023) "Tangible Personal Property in Estate Planning"
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