What Does It Mean to Fund a Trust?
If your estate plan includes a trust, establishing the trust requires more than executing the legal document that sets up the trust. Creating a trust involves a two-step process. The second step is to fund the trust by transferring property into it. Otherwise, the trust has no assets for the trustee to manage and distribute.
The process of funding a trust requires attention to detail and often is complex. When you fund a trust, you should do so only with assistance from the experienced estate planning attorney who helped you create the legal document for the trust. Making mistakes in the process by attempting to fund a trust without help from legal counsel can have devastating consequences.
Funding a Trust
Different types of trusts require different funding processes. When you and your estate planning attorney decide to include a trust in your estate plan, your lawyer explains how you will fund the type of trust in your estate plan.
If you have a testamentary trust, which is a trust that becomes effective on your death, the trust is funded by estate assets after you pass away. Often, provisions in your last will and testament address funding for the trust. Funding the trust may also include special account or beneficiary designations for certain assets like life insurance policies, retirement funds, and financial accounts. Your estate planning lawyer ensures that your testamentary trust is properly funded by including the necessary provisions in your will and making certain that individual assets transfer into the trust when you pass away.
If your estate plan includes a revocable living trust, the trust should be funded immediately after establishment. You must take specific actions to fund the trust by transferring property and assets into it. Funding a living trust should be as much of a priority as creating the trust document. Neglecting to fund your living trust can negate important benefits of establishing it. For example, property that is not correctly placed into the trust will not avoid probate.
Funding a Revocable Living Trust
A revocable living trust without funding is of no value and serves no purpose. The best way to fully establish your living trust is to fund it by working with your estate planning lawyer to transfer your property and assets into the trust. Since you retain full control over anything you transfer into a revocable living trust, there is no reason to delay funding a living trust after you create it.
The process of funding a revocable living trust begins with making a complete list of all your property. You and your lawyer go through the list and decide which assets should be transferred into your living trust. Since different types of property are transferred by different means, your attorney explains the process for individual assets, assists with the necessary documentation, and makes sure that all property is placed in your trust in the proper manner.
For property with formal title documents, like real estate, transferring the property into the trust requires changing the title of the legal documents. These changes must be accomplished in a very specific manner to be effective. You should never try to accomplish this kind of transfer without assistance from your lawyer.
Transferring assets with accounts, like bank, brokerage, and investment accounts, is accomplished by transferring account ownership to the trust. Your attorney will explain fully how you accomplish this transfer with your financial institutions.
Assets with beneficiary designations, such as life insurance policies, must also be transferred, which is accomplished by changing the beneficiary designation. Your lawyer assists with making certain that these changes are properly made.
You also can transfer valuable personal property, like jewelry and fine art, into a living trust. While most of these assets do not have titles, transfer usually can be accomplished with a simple one-page assignment of ownership that covers the assets.
Certain retirement accounts, including IRAs and 401(k)s, cannot be transferred directly into a trust during the owner’s lifetime without creating a taxable event. It’s extremely important to work with an experienced attorney in making beneficiary changes in these accounts, to ensure that you and your beneficiaries receive the maximum tax benefits in accomplishing the transfer. These retirement accounts also require special attention on account of the new distribution rules under the 2019 SECURE Act and because of specific asset protection considerations that apply.
Schedule a Free Consultation With an Experienced East Valley Estate Planning Attorney
At Peterson Law Offices, our estate planning practice includes helping clients create and fund all types of trusts. We welcome inquiries from clients throughout the East Valley, including Queen Creek, San Tan Valley, Gilbert, Mesa, and Chandler. Schedule your free initial consultation by calling 480-878-5998 or using our online contact form.