Revocable living trusts are a highly versatile estate planning instrument. Unlike a will, the trust can assist with managing assets both during life and after death. But the trust is only as useful as the Settlor (trust creator) makes it. Sometimes trust Settlors make a huge mistake that causes the trust to lose many of its benefits.
What’s this biggest mistake that a Settlor tends to make? Failing to fund the trust.
Let’s discuss this topic and how to make a revocable living trust work for you and your family.
What Does it Mean to “Fund” a Trust?
Funding a revocable living trust simply means placing assets into it. There are several ways to do this, depending on the asset type.
For tangible personal property, there is normally a property schedule in the trust instrument. This schedule identifies certain types of items. This will generally be categories, such as:
- Household goods
- Furniture
- Books
- Clothing
- Hobby and sports equipment
- Jewelry
- Decorations
- Electronic devices
Property listed in a schedule generally does not have any sort of registration or certificate of ownership. Listing out such assets is sufficient to make them trust assets.
But certain assets need additional steps taken in order for the revocable living trust to hold them. Merely listing them out in a property schedule is not sufficient to place certain types of assets into a trust. This includes:
- Real estate
- Securities
- Business interests
- Bank accounts
- Investment accounts
- Vehicles
These types of assets need an express update to the form of ownership.
For real estate, this means executing and recording a deed from the owner to the trust. For bank accounts and investment accounts, they must be converted from individual ownership to trust (if the particular financial institution allows this, as not all do). Alternatively, the Settlor may need to name the trust as the beneficiary of such accounts.
Business interests need an update to either the operating agreement, articles of organization, or corporate records to reflect trust ownership.
The bottom line is that the signing ceremony is not the end of the journey. There is additional work needed in order to make the trust work properly.
Why Do People Fail to Fund Their Trusts?
Properly funding a trust takes a significant amount of work. After working with an estate planning attorney to draft and execute documents, it can be quite daunting to do even more work on the plan independently.
It is a common practice for an attorney to draft and record the deed to a client’s primary residence that places the house into the trust. The attorney may also provide certain documentation to transfer ownership of business interests into the trust.
But certain types of asset retitling require work by the client. Attorneys generally don’t update our clients’ bank accounts, investment accounts, etc. Nor do we update beneficiaries on life insurance, retirement accounts, and other transfer-on-death assets.
This is part of the trade-off that comes with creating a revocable living trust. The default for many assets is that they will have to go through the probate process after the owner passes away. This means the time, hassle, and expense of the court system.
The trust avoids that. But it takes work upfront to actually accomplish the goal of making the trust function properly.
Consequences of Failing to Properly Fund Revocable Living Trusts
The purpose of the trust, for many people, is to bypass probate. The successor trustee will privately administer the trust according to its terms after the Settlor passes away. This makes for a quite efficient transfer and management process.
But if the Settlor does not fund the revocable living trust, then many assets will likely end up subject to probate. This defeats the entire purpose of the trust and incurs costs that could have been avoided.
A trust-based estate plan usually includes a pour-over will to catch assets that are not in the trust. At least with the pour-over will, the final destination ends up being the trust. The trustee then manages the assets according to the trust’s terms.
But the pour-over will is supposed to be a backup, not the main transfer mechanism. The effect of failing to fund the trust is that the total cost of the estate plan—upfront and on the backend—may be more than doubled by also incurring greater probate expenses.
Plus, if there are concerns about third-parties coming in and throwing a grenade into the process, this will be much more likely because of the public nature of probate.
Final Thoughts on Funding Living Trusts
While revocable living trusts are excellent estate planning tools, they’re not foolproof. Whoever creates a trust needs to understand what his or her next steps are after executing the trust instrument. This, along with whatever other documents the attorney drafted.
Connell Law, PLLC understands that the additional work needed to fund revocable living trusts can be challenging. We provide our clients with post-execution checklists to help guide them on the exact steps needs to make their plan work.
With this in mind, remember that having a professional guide you in creating and carrying out a plan helps things go much more smoothly than going at it alone. For assistance with your estate plan, or in carrying out a deceased loved one’s plan, contact us for a free consultation.