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Trust Funding Fundamentals

Creating a revocable living trust (RLT) can be an essential foundation of your estate planning. Nevertheless, your RLT is nothing but a stack of paper until it holds title to your assets now or in the future. Either way, this process is commonly known as “funding” an RLT. Ensuring that your RLT is funded in a manner that is consistent with your overall estate planning goals is critical. As you review the below newsletter, please note that the below is not legal advice and is generally true. You should be mindful that you and your estate planning attorney may have intentionally made trust funding decisions that are different than the below.

An Overview of Transferring Assets to a Trust

Until you fund your RLT, it has no assets to manage should you become incapacitated or to distribute upon your passing. If you are married, likely you own some assets individually and some jointly with your spouse. You and your spouse set up either one joint RLT or each of you has your own RLT. Either way, you need to transfer the title, assign ownership rights, or change the beneficiaries of all the assets you want to be held in trust.

If you do not complete these steps, your trustee cannot manage your assets when you become disabled or die. Your assets that were not retitled will be subject to probate and “probate avoidance” is one of the fundamental purposes of estate planning with an RLT. With regard to those assets, you will lose all of the benefits of having an RLT. Your intended beneficiaries might not inherit the assets you intended in the way you intended.

How to Fund Your Trust

The procedure for funding your trust will depend on the type of asset. Some assets need to be titled in the RLT now, while other assets should be transferred to your RLT at death through beneficiary designations.

Assets You Need to Retitle

Generally speaking, investments, bank accounts, and real estate should be formally retitled (unless you have made other specific arrangements for those assets). For example, you might change the title from “Pat Smith,” “Robin Smith,” or “Pat and Robin Smith” to “Pat and Robin Smith, Trustees, or their successors in trust, under the Smith Family Living Trust, dated June 1, 2020, and any amendments thereto.”

You can transfer these assets into your trust using this method:

Checking and savings accounts
Investment and brokerage accounts that are not IRAs or 401(k) accounts
Stocks or bonds in certificate form
Your home and other real estate

You can change the ownership of these accounts because they already have legal titles.

Changing the Beneficiary

Sometimes you simply need to re-designate the primary or secondary beneficiary on certain assets to your RLT. For example, on your life insurance, 401(k), 403(b), or IRA, all you need to do is change the beneficiary to the trust. You still directly own the asset until your death. Changing the beneficiary also works for some medical savings accounts (MSAs), health savings accounts (HSAs) and pension benefits.

Certain federal or state laws might restrict your right to change beneficiaries. The specific language that you must use to retitle assets to your trust can also differ from one state to the next. Before designating an RLT as a designated beneficiary of a retirement fund, be sure to seek legal and tax counsel.

Assets Without Legal Titles

Remember to “assign” your ownership rights in assets that may not have legal titles. The kinds of assets in this category may include:

Items of “tangible personal property” (e.g., antiques, artwork, musical instruments, collections and jewelry)
Money owed to you for personal loans
Copyrights and patents
Royalties
Some mineral, gas and oil rights
Interests in partnerships and other business ventures

After the assignment, your RLT will own your rights, title and interests with regard to these assets.

Final Thoughts

Like estate planning itself, the “funding” process is a “process,” not a set-it-and-forget-it event. Consequently, as you buy, sell, and trade assets of whatever nature or kind, be mindful of the need to ensure proper title and beneficiary “alignment” with your estate plan.