Funding a Trust

A trust is a legal agreement that allows you to give your asset to a third party, known as a Trustee, to hold and manage on behalf of a beneficiary. Creating a trust provides you with many options for the management of your assets, whether your goal is to shield your wealth from taxes or pass it onto the next generation.

Perhaps the biggest advantage provided by a trust is probate avoidance. Probate is the court-administered process by which your assets are distributed to your heirs after your death. Probate can be time-consuming and expensive, and in most cases, should be avoided.

The probate process is triggered when you die owning assets in your own name. This leaves those assets without an owner. If, however, you transfer your assets into a trust before you pass away, your assets will be owned by the trust when you die, and will therefore not trigger probate.

How to Fund a Trust?

Once a trust is created, in order for it to function as intended, it needs to be funded. Funding a trust is the process of re-titling your assets in the name of your trust so that the trust becomes their legal owner.

Whether your loved ones avoid the nightmare of probate will depend on how diligent you are at making sure that your trust is funded with all the assets you currently own, as well as those that you acquire in the future.

Some people initially fund their trust but fail to continue funding the trust with the new assets that they acquire throughout their lifetime. When this happens, it is not good, but it's also not the end of the world.

This is because a trust is often coupled with a Pour-Over Will that transfers “leftover” assets into a person's trust upon their death. However, since transferring assets into a trust via a Pour-Over Will subjects those assets to the probate process, it should only be seen as a safety net and not as a substitute for re-titling all of your assets in the name of your trust during your lifetime.

What Types of Assets Should Be Put into a Trust?

In general, the types of assets you should put into your trust are as follows:

  • Real Property - this is usually the largest asset in any estate. Any real property in which you own an interest (alone or jointly) should be retitled in the name of your trust. This can be done by recording a deed with the county where the property is located. However, unless you truly have experience executing property deeds, you should enlist the services of an experienced professional to fund your trust with your real property.
  • Financial Accounts - your checking and savings accounts, CDs, brokerage and investment accounts, safety deposit boxes, and any other type of financial account should also be re-titled in the name of your trust. Call your financial institutions to find out what you need to provide them with in order to transfer your accounts to the name of your living trust. They may have their own specific documents and/or procedures that you will need to complete.
  • Business Interest - if you own any business interest, such as interest in an LLC or corporation, your interest in that business can be held in the name of your living trust.
  • Life Insurance - We usually recommend that your life insurance policy list your trust as either the owner or the beneficiary. This way, the trust will receive the proceeds of your life insurance policy, and dictate how the funds will be distributed to your beneficiaries.

Note: Trusts come in two varieties: revocable and irrevocable. Assets can be moved in and out of a revocable trust at any time. However, once you place an asset into an irrevocable trust it will be very difficult, if not impossible, to take it out again. So, you should carefully consider, with the guidance of a qualified estate planning attorney, what assets you will place into any irrevocable trust you create.

Retirement Accounts

One asset that should never be put into a trust is a retirement account. This includes IRAs, 401(k)s, pensions, 403(b)s, etc. These types of assets should never be titled in the name of your living trust. Instead, you should designate either your trust, your spouse (if you are married), or other individuals or entities that you want to support as the beneficiaries of these accounts.

The Importance of Funding a Trust

Just like a business can only control assets that are owned by the business, a trust can only control the assets that are owned by the trust. If you want your trust to enable your assets to bypass probate and to control how those assets are distributed to your heirs after you pass away, your trust has to be the owner of your assets.

Properly funding your trust is just as important as actually drafting your trust document. Failing to properly fund your trust could negate all or some of the benefits of creating a trust in the first place.

It doesn't do you any good to spend the time, money, and effort to create a living trust that will not work as intended because it was not properly funded. So, make sure that you work with an experienced estate planning attorney to fund your trust properly.