Funding a Living Trust

The # 1 mistake people make with their living trusts is failing to properly "fund" them.

Funding a living trust is simply transferring assets from your own name to the name of the trust.

What kind of assets might you transfer?

How do you fund a living trust?

You simply transfer assets from your name into the name of the trustee of the trust.

For example, if you want to transfer your mutual fund account to your living trust, you will need to obtain the appropriate form from your mutual fund company and change the name of the owner of the account.

• Instead of the account saying: "Owner – Jeff and Jane Smith"
  
• It will now say something like: "Owner -- Jeff and Jane Smith, Trustees of the Smith Family Trust"

The problem with funding a living trust is that it is a bit of a pain.

Obviously, obtaining and correctly completing and submitting all the proper forms is not fun. Also, fees are sometimes charged for filing a new title. Once in a while, the asset is so complex (i.e. a business) that an attorney will have to draft the transfer documents.

Another problem is that it is cumbersome to use some assets after they are transferred to a trust.

You can imagine the confusion in the supermarket line as you try to explain to the cashier that you are signing a check in your capacity as trustee of your trust fund….

But, there are ways around these issues.

To get around the checking account issue – simply keep a small, personal checking account, out of the trust, to write day-to-day checks on.

Difficult issues also seem to often come up if you try to obtain a mortgage on real estate that is held in a trust. It can be done, but it can be difficult.

Certain kinds of businesses are not well suited to be in a living trust. For example, a real estate development company would find it cumbersome to deal with lenders, title companies, etc – as a trust.

However, as discussed at How to Avoid Probate, if you place out-of-state real estate in a living trust, you gain the great benefit of avoiding an ancillary probate proceeding on that property.

So, you need to weigh all the circumstances before deciding which assets to place in your living trust. For real estate, if you are likely to sell or re-mortgage the property soon, it probably should not be placed in your living trust. But, if you plan to keep the property for life -- it probably should go in your living trust. You should discuss with your attorney which assets are best suited for your living trust now and which, perhaps, should placed there later.

As this site mentions so often, flexibility is a great advantage with a living trust. So, for instance, you could hold off on funding your living trust. If you are young, and in good health, it might make sense to keep you assets in your own name for now. If you will soon be moving and selling your house, it makes little sense to put the house in your living trust.

Maybe, when you are older, and more settled, the cost/benefit analysis shifts in favor of funding the living trust.

However, some people obtain a living trust and never intend to transfer assets to it during their life. The reason they have it, is simply in case they want to use it in the future.

For instance, if their health deteriorates, they might decide to fund the trust so that their family can easily manage their assets in the event of incapacity. See Living Trust and Guardianship.

Or, they may never substantially fund the living trust and simply direct in their will that their assets be "poured" into the living trust that they've already been established. [I use the word "substantially" because in most states a living trust will not be deemed to be valid unless it is funded with some property (even a nominal $10) before its creator's death.] Again, however, only the assets transferred to the trust during life will avoid probate. See How To Avoid Probate.]

So, there are many reasons someone might choose not to fund a living trust immediately or maybe not fund it while living at all.

As this website tries to make clear, a living trust is an extremely flexible vehicle and offers many estate planning options. The issue of whether and when to fund the living trust is an example of its flexibility.

BUT the really important thing is that you have a plan; know what that plan is; and, take the necessary steps to implement it.

If your plan is to use your living trust to avoid probate – then you do need to fund your living trust.

Unfortunately, too often, people will have a living trust prepared by their attorney and assume their assets will magically be distributed according to the terms of the trust. They either forget to transfer the assets or do not properly transfer them. Of course, the living trust can't transfer assets it doesn't have.

Even worse, the problem may not be discovered until after death – when it is too late. The estate may be forced into an unanticipated probate. Then, depending on what the will says, if there is a separate will, the assets may never end up in the living trust and may never be distributed as intended.

The bottom line is that it is absolutely crucial that you think through the pros and cons of funding a living trust and thoroughly discuss the issue with your attorney. The funding issue is central to your decision whether to get a living trust and, if you get one, what you want to do with it.

Articles Relevant to this Topic:

• Establishing A Revocable Living Trust
  
  

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