You signed your Revocable Living Trust and left your final signing appointment with your documents and a folder of “funding homework.” The paralegal reviewed letters of instruction to take to your financial institutions and completed change of beneficiary forms. So what now? And why is this step so important to having an estate plan that will work in the event of your incapacity or death? A Living Trust is a way to hold title to assets, just like sole ownership or joint tenancy. The main reason most individuals choose an estate plan that includes a Revocable Living Trust is to avoid probate. The only way to accomplish this is to set up the trust and properly fund it. Funding a trust is the process of transferring your assets to the ownership of your trust. Once ownership is transferred, the trustee will have control of these assets. The funding process is arguably the most important step of your estate plan.
Funding a trust refers to taking assets that are titled in your individual name or in joint names with others and retitling them into the name of the Revocable Living Trust. For example, if Bill and Mary Jones set up a Revocable Living Trust and name themselves as initial co-trustees then they will need to re-title their assets to the “Bill and Mary Jones, Trustee or their successors in trust under the Jones Living Trust dated April 1, 2021, and any amendments thereto.” The assets that you generally want to include in your Revocable Living Trust include real estate, bank accounts, brokerage accounts, savings bonds and stocks.
The tricky part of making sure your Revocable Living Trust works with your estate plan is that each asset is treated differently and your estate planning attorney should make a recommendation for each asset you own. For example, a house is re-titled by executing a new deed and having it filed with the county land records. Bank accounts will usually require a letter of instruction and copy of your certificate of trust (i.e., summary of your trust) to the various financial institutions where you have accounts.
Are there any assets that I should not transfer to my trust?
Most assets should be owned by your trust, but some should not. For example, an Individual Retirement Account (IRA) needs to be in your individual name. You can name the trust as the beneficiary of the IRA, but this should be discussed with your estate planning attorney as you set up your estate plan. Additionally, your life insurance policy will typically remain in your individual name and the trust may be updated as the beneficiary on that asset. Also, if you’re receiving social security which is directly deposited into your bank account, you cannot re-title that account into the name of the trust, but you will likely be able to add a payable on death beneficiary to the account to have it transfer to your trust at the time of your death and avoid probate.
What happens if my trust is not funded?
If you do not fund your trust by transferring title to your assets, then any asset in your individual name without a named beneficiary will be subject to probate. In addition to probate being stressful and expensive, failing to transfer assets to your trust may mean that your assets may not go to the people you want. The funding process can sometimes be time consuming, but it is the most important part of making sure your estate plan works when you need it to. You invested your time and money to set up your trust to avoid probate, so make sure it works!