Trusts can be tremendously valuable tools in an estate plan, including protecting assets from extraneous court oversight. But a trust can only accomplish this intended goal if it is funded properly. What does this mean?
Funding a trust involves transferring assets into the trust. The method of transfer differs depending on the type of asset, and the amount that you need to transfer will depend on the objectives of the trust. A trust is a personal, unique creation, so the process of funding a trust will differ each time. But considering the basic concepts and examples can give you an idea of how to fund your particular trust.
Although people tend to associate trusts with accounts, a trust is actually a virtual container. This container can hold one or more accounts or parcels of real property, and that is why so many people associate trust funds with bank or brokerage accounts. When you work with an attorney to create a trust, it is an empty vessel. You need to take active steps to fill it or fund it.
What you choose to move into the trust will depend on why you created the trust. If you established a revocable living trust to enable your assets to pass to loved ones outside the probate process, then you need to transfer all assets that would become part of your “probatable” estate otherwise. This includes real estate, personal property, and possibly accounts. While any account/insurance policy with a beneficiary clause does not need to be transferred into this type of trust (so long as you appropriately designate beneficiaries to receive those assets), it’s a wise idea to review the use of beneficiary designations with your attorney.
If instead you established a trust to provide help for a child with special needs, you would need to transfer enough assets to meet anticipated future needs. This amount could change over time, so you should review the funding regularly to see whether assets should be added. As another example, if you established an irrevocable trust to protect assets from creditors, the assets you want to protect should be moved into the trust.
If your trust is designed to avoid probate, one of the most crucial steps you need to take is to transfer all real estate into the trust, including real estate owned in other states. To do this, you need to (have an attorney) prepare a new deed to the property, and the deed must be recorded in the county where the property is located.
When a bank or other party holds a mortgage on the property, you may need to obtain permission before transferring ownership to the trust. This is usually a simple matter when property is being moved to a revocable trust because the creator of the trust still retains control over the property. The mortgage holder may be much more concerned about transferring property into an irrevocable trust. Failure to obtain permission could lead to problems, such as acceleration of the loan.
You may read conflicting advice about whether and how to transfer bank accounts and securities into a trust. If you need a ready source of funds in your trust to make distributions to the beneficiary, then you will probably want to move assets or entire accounts into the trust. Your attorney and the institution you are working with can help you determine what to move and the preferred method of completing the transaction.
Retirement accounts generally cannot be transferred into a trust because of the potential tax penalties, but it may make sense to designate your trust as a beneficiary. You can use beneficiary clauses and payable on death provisions to keep many accounts out of probate, so accounts may not need to be moved into a trust if probate avoidance is your primary goal. You should discuss potential transfers with an estate planning attorney who understands your particular situation and goals.
Not taking the right steps to fund a trust is the estate planning equivalent of fumbling the ball at the five-yard line. The creation of the trust represents significant effort, but if assets are not properly transferred into the trust, you cannot gain the benefits the trust is meant to impart.
To get the rewards you’ve earned for creating a trust, you need to fund it properly, so don’t be afraid to ask for advice about the right steps to take in your circumstances. At Blacksburg Law, we are dedicated to helping our clients reach their objectives, and we know funding a trust is a critical component. If you would like assistance with your trust or a review of your plans to see if adjustments would be beneficial, schedule a time to talk with us.
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