Why Funding Living Trusts is so Important

The revocable living trust is one of the most useful and flexible tools in estate planning. A living trust has two advantages over a traditional will. A living trust can provide for the settlor's potential disability and avoid probate of the settlor's estate at death. Neither of these objectives will be accomplished, however, if the trust is not funded with the settlor's assets. This article shows how a revocable living trust is essentially worthless if your assets are not funded into it. The Key to an Effective Revocable Living Trust

For purposes of settling estates under state law, a trust is recognized as a legal entity separate from the settlor. Thus, property owned by a settlor is not owned by the trust. Even if the trust is a properly executed, valid trust, the trustee of the trust has no authority whatsoever over property owned individually by the settlor. Conversely, property owned by the trust is not owned by the settlor. This is true even if the settlor is also the trustee of the trust. To fund an asset, the owner transfers title to the asset from his or her own name to the trustee of the trust. Even if the settlor is the trustee, the formal transfer of title from the settlor, as an individual, to the settlor, as a trustee, is required. With respect to any property, the trustee's powers and duties with regard to that property do not arise until the trust actually owns the property.

Caveat: For federal income tax purposes, a revocable living trust is disregarded. The income and deductions of the trust are considered to be the income and deductions of the settlor, so long as the settlor retains the right to revoke the trust. The settlor and the trust use the same Social Security number; the trust does not have to apply for an Employer Identification Number (EIN) until the settlor dies.

Funded vs. Unfunded

Bob owns a home, a brokerage account, and a checking account in his own name. Assume that Bob visits an attorney to have a living trust prepared, naming Jan as successor trustee. After the trust agreement is signed, the attorney advises Bob that he must transfer all his assets to the trust. Bob plans to attend to the trust funding but does not get around to it.

Incapacity. If Bob becomes incapable of handling his own affairs, family members will have to initiate a guardianship proceeding to have Bob declared legally incompetent. Subject to statutory guidance, the guardianship court will appoint the guardian that the judge believes will best serve Bob's interests. A guardianship under state law is typically expensive because annual reports to a court are required. Also, the typical guardian does not have the flexibility that a successor trustee has because the trust instrument generally gives a successor trustee powers much broader than the statutory powers allotted to guardians. What about the trust? The successor trustee Jan only has authority over property that has been properly transferred to the trust. Because the trust is not funded, Bob's goal of avoiding a guardianship and choosing who will take care of his assets is not accomplished. If Bob's property had been transferred to the trust before he became incapacitated, there would have been a seamless transition from Bob, as trustee, to Jan, as successor trustee, without the necessity for public proceedings and unnecessary expenses and restrictions.

Death. When Bob dies, the probate judge will appoint an administrator of Bob's estate who will identify his assets and pay his debts and expenses. The three assets still owned by Bob individually will be subject to the expense and delay of probate. If Bob had a pour-over will, the assets would have to be transferred to the trust and distributed by the trustee. If Bob had funded his trust before he died, there would have been no probate, and the property would have gone to the beneficiaries selected by Bob in the manner that Bob specified.


There is no reason to have a living trust prepared unless you plan to fund it by transferring all your assets from your own name into the name of the trustee. If the trust is properly funded, it will achieve the valuable objectives of providing for the settlor's potential disability and avoiding probate.