The Importance of Trust "Funding"
Updated: Oct 22, 2020
A Common Mistake When Creating Trusts
A revocable living trust, or some derivative thereof, is now becoming the "go-to" for estate planning. Many times clients will speak with their estate planning attorney, or advisor, who recommend a trust be drafted to manage the client's estate in the event of death or incapacity. After going through the process of deciding who they want to serve as trustees, designate beneficiaries, and structure any distributions from the trust, the clients sign and complete their trust. Feeling a sense of relief and accomplishment, clients often times take their trust to a safety deposit box or secure place in their house, set it... and forget it. While this may be acceptable for a Last Will and Testament, a trust needs to be funded in order to maximize the value a trust can provide to the clients.
What Is Trust Funding?
Trust funding, put simply, is transferring assets into the name of the trust or otherwise nominating the trust to be the owner/operator of a particular asset. An very helpful analogy is that of a "bucket." In order for a trust to control the assets of an estate, such asset need to be placed in the bucket. When purchasing a home, it is common practice that individuals receive a deed from the seller which conveys title of the home to the buyers in their individual names, e.g., Callie Doe ("Seller") sells her home to Claire Buck and Aaron Buck ("Buyers"), after the purchase a deed is drafted to convey the property from Callie Doe, Grantor, to Claire Buck and Aaron Buck, Grantees, as individuals. Once Claire and Aaron Buck have the property in their names as individuals, they must deed (fund) the property to their trust, The Claire Buck and Aaron Buck Family Living Trust.
Unless additional actions are taken, such as preparing a Pour-Over Will (a Will that essentially names your trust as the beneficiary) or naming the trust as a P.O.D. or T.O.D. beneficiary, some assets may never be placed inside the trust bucket, which may create a need to have such items probated and not be subjected to the terms of the trust. Other common assets that will need to be funded, or have title transferred to the trust, may include: checking accounts, savings accounts, life insurance policies, additional real property, vehicles, investments, business interests, etc.
How To Fund Your Trust
The best practices approach to making sure that your trust is funded is to begin with drafting an inventory before and immediately after creating your trust. This inventory should set forth a list that reasonably identifies what assets are in the estate and which ones are both currently in the trust and what needs to be transferred. How an asset should be funded into the trust will depend on the type of asset and degree of ownership in such asset, i.e., if you only have an undivided half interest (1/2) in a piece of property, you can only transfer into trust the interest you own, but not the entire property. For real property, there are multiple deeds that you can use to convey your interest into your trust. For bank accounts and investments, banks and your investment advisors can help to either transfer, establish new accounts, or designate your trust as a beneficiary of a particular asset.
Reviewing And Updating
Once you have created a trust it is important to consistently review and update your bucket. We always advise clients to revisit their trust every 3-5 years, barring any life altering event that may require immediate attention.