The Importance of Funding
This article addresses the importance of funding your trust, defines funding, and explores the different ways to fund a trust, looking at pros and cons. Some of these rules may vary state to state, asset to asset, as well as financial institution, so always be sure to speak with your attorney before placing your assets in trust.
So you finally made the plunge and decided to get your affairs in order. You met with an estate planning attorney, you discussed your options, decided on a trust, and executed that trust into creation. Everything is taken care of and your plan is in motion… right? Not necessarily. There is one very important step that still remains, and that is the process of funding your trust.
Funding is a term used to mean the act of retitling your assets to ensure that they flow through your trust, whether during your lifetime, or at death. If you do not fund your trust, then the only thing that you have is an expensive piece of paper. Remember, that a trust is an agreement between three parties to hold onto assets. If the trust does not have any assets, then its rules do not apply. The trust only controls the assets which are owned by the trust itself. If you have assets in your name, in a spouse’s name, or in a different entity’s name, then your trust has no control and no effect on that asset. Often times when setting up trusts, we are doing so to create certain rules, restrictions, and protections for the assets that are going to determine the manner in which our beneficiaries get to enjoy the assets we leave behind. If none or only some of your assets are funded, then you are missing out on all these benefits.
Understanding the importance of funding is the first step to finalizing your trust agreement. This is a necessary step in utilizing your trust properly, and many times the onus of funding the trust rests with the client. There are only certain things that your attorney, or financial professionals are allowed to do on your behalf, and that means that you need to take deliberate steps to fund your trust. That being said, your attorney should always be available to answer questions, provide guidance, and instruct you on how to properly fund your trust.
Funding can happen in one of two ways. First, the trust can be the new owner of an asset. You may own certain assets which are titled under your name. Your checking account, real estate, investments, vehicles, retirement accounts, and many other things will specifically list that you personally own that asset. Perhaps you share it with a spouse, or someone else, but the name on the account, title, or deed is yours. For some of these assets, you may desire that the trust become the owner instead of you. This type of funding is called retitling. Retitling an asset means to remove the asset from your name, and anyone else’s name, and instead have your trust become the new owner. The account, deed, or title, will actually read “Joe’s Living Trust” rather than Joe himself. By retitling the asset, you no longer are the owner of the asset and instead the trust controls and provides rules for how that asset is managed. Every trust is different, and every trust will have different rules for how these assets are going to be managed. Remember that it is the trustee of the trust who is in charge of following these rules, so if you are not the trustee of your trust, you may lose control and decision-making authority of that asset. Furthermore, if you are not the beneficiary of your trust, you may lose the ability to utilize or spend that asset. Always speak with your attorney before transferring an asset to a trust and be sure to understand how your trust works.
The Second form of funding is naming the trust as a beneficiary. By naming the trust as the beneficiary, you retain lifetime control and ownership of the asset. After you pass away, the trust then becomes the owner, and its rules apply only at your death. This can also be called “Pay on Death”, “Transfer on Death”, and “Beneficiary Designation”. Regardless of the name, the method is the same: you retain ownership for life, the trust receives ownership at death.
With these options in mind, how do you choose which way to fund your trust? Typically this happens on an asset-by-asset basis. Meaning, you may select a different option for each asset, depending on your goals and the type of asset. For some assets, the choice is already made for you. Real estate has no option for true beneficiary designation. If you want your real estate to be in your trust, you need to draw up a new deed and retitle that property into your trust. You will want your attorney, or other real estate professional to help with this. On the flip side, retirement accounts, such as 401(k)s, 403(b)s, IRA, Roths, etc. must stay in the name of the retiree. Because of that, you cannot retitle these accounts, and your only option is to name the trust as the beneficiary. There are different rules for most assets types, and these are just a couple of examples. You may need to work with your attorney and the financial institution managing the asset, to know what your specific rules are for that asset.
For every other asset which is not bound by specific rules, you have a choice. You can transfer the asset during your lifetime, or have it transfer at death. Each method has its upsides and downsides, which can vary, depending on your trust’s rules. Generally speaking, the major benefit of retitling the asset is you not only ensure that your trust rules control, but you are also relieving your trustee from having to transfer that asset later. The work is already done, and your beneficiaries get to enjoy the use of those assets immediately. On the other hand, if an asset only transfers at death, your trustee is going to be required to contact the financial institution and transfer the asset to your trust. This can involve paperwork and time. However, if you retitle an account from your name to the name of your trust, this is often accomplished by closing the account in your name, and opening a new account in the name of the trust. This new account has a new account number, which can affect direct deposits, auto-pays, and any checkbooks or debit cards tied to that account. The extra work that goes into setting that all up again may dissuade individuals from retitling the assets during their lifetime.
Regardless of the method you choose, always be sure that your trust is fully funded. You should also keep an accurate record of the trust assets, as well as create an accounting each year for the trust. Your beneficiaries and trustees will thank you when they have a complete and accurate record of all of your financial accounts and real estate, and are not spending time and money trying to figure out what exactly they inherited! As always, speak to your attorney if you have questions on funding, and if you have more than one trust, make sure that you understand the differences between them, and why an asset might go into one or the other.
