Many families incur the time and expense of creating a trust as the foundation of their estate plan, but since some estate planning attorneys don’t take the important step of assisting their clients with the essential “funding” process, the trust doesn’t work when the clients need it to. Unfortunately, there is no such thing as a well-timed death (or incapacitating illness) and leaving a trust unfunded renders it virtually useless when it is needed most.
To “fund” a trust simply means to transfer assets from the name of the owner to the name of the trust. So for example, a brokerage account or personal residence owned by "Bob and Mary Smith" should be retitled as "Bob and Mary Smith, Trustees of the Smith Family Trust." This transfer is necessary to effectively utilize the trust in the manner for which it was intended.
In general, a trust has two primary benefits. It efficiently and quickly allows for distribution of assets according to the wishes of the trustor (the person or couple who created the trust) at the time of death; and it ensures that the trustor’s wealth is properly managed in the event of incapacity. However, a trust can only control assets that it “owns” (e.g. assets whose titles are put in the name of the trust). Any asset that is still owned by the trustor individually at the time of death or incapacity will not be considered part of the trust and may be subject to probate at the passing of the trustor. Thus, if most or all assets are not put into the trust, it can become little more than a lovely set of spiral-bound papers.
An estate planning lawyer can also assist in transferring certain assets such as ownership interests in small businesses and can prepare an assignment to transfer “untitled” property such as personal goods (jewelry, collectibles, etc.). Ultimately, though, it is still the trustor who is responsible for ensuring that all appropriate assets are put into the trust. For real estate, this would involve retitling the property in the name or the trust and obtaining a new deed. New paperwork may be required for transferring other assets such as bank accounts.
However, not all assets should be put into a trust. Ideally, the trustor engages in a comprehensive estate planning process with their attorney, through which each asset is reviewed and discussed. The attorney may advise against transferring certain assets to the trust for tax reasons — such as retirement accounts as well as some types of annuities and stock options. There may be exceptions depending on the family situation, state laws, and other factors, which is why a good estate planning attorney usually works hand-in-hand with the trustor’s accountant and financial advisors to ensure that all aspects of the estate plan are well-coordinated.
Another crucial aspect of “funding” a trust that is often overlooked — and with costly consequences — is the failure to coordinate with the trust the beneficiary designations of retirement accounts, life insurance and certain bank or brokerage accounts. Beneficiary designations typically take precedence over trusts.
It is important to match the beneficiary designations with the living trust in order to ensure that the assets are distributed based on the trustor’s instructions. Moreover, proper integration of these designations with the trust can maximize the effectiveness of one’s overall estate plan. By naming the trust as the beneficiary of life insurance, for example, the proceeds can be used to provide liquidity to the family and ensure that assets are appropriately managed for children or young adults.
As a general rule, I have my clients name their spouse as the primary beneficiary of retirement plans and name their living trust as the contingent beneficiary. It is always best to consult an expert to determine the best strategy depending on one’s assets, family situation, and goals.
Estate planning does not end once you’ve signed your living trust. It is an ongoing process that requires monitoring and attention — assets could be removed from the trust just as new ones are acquired; beneficiary designations could be changed by marriage, divorce, birth, or death.
Regular review of one’s estate plan (perhaps every one or two years) is recommended to ensure that it is implemented in accordance to your current wishes. I know it may seem like this process requires a good deal of work or thought, but perhaps if you think of it as a labor of love that you are undertaking to make things easier for your loved ones in the event of your death or incapacity, the task may seem a bit easier to bear.