A Revocable Living Trust is the single most effective estate and disability planning tool. About 20% of Americans have invested in creating this valuable planning document and yet many of those do not follow through with the next important step and “fund” their trust.
A trust is like an impenetrable vault. It can be fire proof. It can be smoke proof. It can be burglar proof. But if there is nothing in the vault, that vault does not protect anything. It is merely an expensive box.
A trust is similar to a vault. It can be the most comprehensive and individualized estate document, but without any assets placed inside it, the trust protects nothing. Your entire estate will now go through the expensive and time-consuming probate process.
What is Trust “Funding”?
Funding your trust is the process of transferring your assets from you to your trust. To do this, you physically change the titles of your assets from your individual name (or joint names, if married) to the name of your trust. You will also change most beneficiary designations to your trust, which means these assets are transferred to your trust at your death.
Which assets should I put in my trust?
The general idea is that all of your assets should be in your trust. However, there are a few assets you may not want in, or that cannot be put into, your trust.
Generally, assets you want in your trust include real estate, bank/saving accounts, investments, business interests and notes payable to you. You will also want to change most beneficiary designations to your trust so those assets will flow into your trust and be part of your overall plan.
You may exclude some assets from your trust such as IRAs and other tax-deferred retirement accounts, incentive stock options and Section 1244 stock, and interests in professional corporations. In Arizona, vehicles are typically not re-titled in the name of your trust. Also, your attorney may have a valid reason for leaving a certain asset out of your trust, such as avoiding a potential lawsuit.
You should discuss funding with your attorney. Depending on your estate planning goals and types of assets you have, your attorney will provide guidance as to what assets should be titled in the name of your trust, and which assets should not be. Making the wrong decision could have tax or probate consequences.
Who is responsible for funding my trust?
You are ultimately responsible for making sure all of your appropriate assets are transferred to your trust. Your attorney may assist you with transferring all or some of these assets.
How difficult is the funding process?
Funding is not difficult, but it can be cumbersome and take some time. Many people get sidetracked or procrastinate, which is why their trusts remain “empty.” Just make funding your trust a priority and keep going until you’re finished. Make a list of your assets, their values and locations, then start with the most valuable ones and work your way down. And remember, each time you purchase or receive an asset, determine with your attorney whether it should be placed in your trust.
What happens if I forget to transfer an asset?
If you have a trust you should also have a “pour over will” that acts like a safety net. When you die, the will “catches” any forgotten asset and “pours” it into your trust. The asset will probably go through probate first, but then it can be distributed according to the instructions in your trust.