Trust Funding – It Continues to be a Problem
It has been a few years since we last addressed the topic of failure to properly fund trusts, yet it seems to persist as a problem in many trust-based estate plans. Time and again estates must go to probate because assets were not properly transferred to the trust. Trusts can provide many estate planning benefits, but only if the trust actually owns or receives assets. Signing the trust is just part one. There is more to do. If the trust is going to work properly, the next step is to fund the trust. Most law offices that prepare estate planning documents either do not provide funding services or charge an additional amount to do so. It is generally not part of the base fee you will be quoted.
“Funding” a trust means the transfer of ownership of assets into the name of the trust or to list the trust as the beneficiary upon your death. To transfer ownership of an asset, the title (or ownership) of the asset must be transferred from an individual name (or joint names, if married) to the name of the trust. Each asset should be evaluated individually to determine the approach necessary to coordinate ownership or beneficiary designations with the goals and objectives of the estate plan.
Why is trust funding so important? Until the trust is funded, it doesn’t control anything. Assets without proper beneficiary designations or not properly transferred into the trust prior to death or the onset of incapacity may be subject to probate or conservatorship proceedings and may not pass to a desired beneficiary. This can result in negative and potentially costly consequences. Most importantly, it means your goals and objectives may not be achieved.
There are very few limitations on what a trust can own. Among other things, a trust can own:
· Real property (home, land, other real estate)
· Bank/credit union accounts
· Safe deposit boxes
· Investments such as CDs, stocks, mutual funds, etc.
· Promissory notes – money owed to you
· Life insurance
· Business interests such as LLCs or Corporations
· Intellectual property
· Oil and gas interests
There are a few assets that cannot or should not be put into your trust. These include:
· IRAs and other tax-deferred retirement accounts
· Incentive stock options and Section 1244 stock
· Certain types of annuities
You should also be cautious with interests in a professional business where trust ownership may violate licensing requirements. It is also important to remember that if the trust is an irrevocable trust, you will only be able to get the asset back out as allowed by the trust and it may cause tax consequences to do so. If the trust is a revocable trust, assets can be added to or removed from the trust in your complete discretion.
Funding a trust is, for the most part, not difficult. However, it does take some time. Many of the changes can be handled online, or by mail, email, or telephone, but some institutions, such as banks, may require you to show up in person. The institution you are working with may want to see proof that your trust exists. This is often satisfied with what is known as a certificate of trust. This is an affidavit of sorts that verifies the trust’s existence, identifies the trustees, and may discuss trustee powers. It should not reveal information about your assets, your beneficiaries, or their inheritance.
If you are struggling with the process of getting your trust funded or are not sure you have done so, please contact your attorney for assistance. Regular review and participation in trust maintenance plans can help in making sure your trust not only exists, but that it functions as expected when the time comes. This can only happen if the trust is properly funded.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.