Imagine buying a beautiful new family car, taking it home, and leaving it parked in your garage. Then, instead of using your shiny new vehicle to transport your family, you use public transportation to get you and your family around. As silly as that sounds, that is what happens to many clients who establish trusts but are not properly advised on how to fund them. This article will begin with an overview of trusts, then discuss the importance of funding trusts and finish with common examples. We will focus on the revocable living trust as a tool to avoid probate, but keep in mind that there are many different types of trusts with different purposes. This article is only a brief overview and any practical decisions should be discussed with a competent estate planning attorney.
An Overview of Trusts:
Simplified, a trust is a family agreement wherein you ask someone you trust to take care of the assets you transfer into the trust. That person, called the trustee, is often you while you’re alive and a child or relative after you pass away. A trust can have its own separate tax identification number, but often uses the social security number of its creator, also known as the Grantor. Trusts can be used for a variety of purposes, including protecting assets when applying for Medicaid. Almost all trusts avoid the court process of probate, which can sometimes be lengthy and expensive. Avoiding probate means that your beneficiaries can have access to your assets almost immediately and do not have to wait until the Surrogate’s Court accepts your Last Will as valid.
Why Fund a Trust?:
In order for a trustee to have any control over the assets of a trust, that asset needs to be owned by the trust. For example, if Joe sets up a trust and names Jane as the trustee to allow her to manage his bank account when he passes away, he needs to make sure that the bank account is owned by the trust. Otherwise, the bank account will remain in his individual name and will require probate. The same hold true for all of Joe’s assets, including his home, investments, real estate, and businesses. In addition, if Joe is trying to qualify for Medicaid and needs to transfer his assets to do so, setting up a trust is not enough, he will also need to transfer his assets into the trust so that they are no longer in his name. Not funding a trust is like buying that beautiful car, but never using it.
How To Fund a Trust:
Trusts are funded differently depending on the assets you need to place inside of it. Below are a few examples:
- Real Property: A new deed transferring the property into the trust needs to be executed, notarized and recorded with the county clerk in the county where the property is located. Always make sure that you speak with your property insurance carrier to make sure that the trust and trustee will be covered if there is a claim. Typically that is accomplished by adding the trust and trustee as the owners or an additional insureds on the policy. If there is a mortgage on the real property, care should be taken to make sure that the transfer will not trigger the “due on sale clause”. An attorney should always be consulted prior to making any transfer.
- Bank Accounts and CDs: Money Market Accounts, Checking Accounts, Savings Accounts and CD can be transferred into your trust by going to the bank and showing them a copy of the trust and asking for them to transfer the assets into it.
- IRA, 401(k), 403(b), etc: While these accounts should be held in your personal name for tax purposes, you can, in theory, list your trust as the beneficiary of these accounts. This is usually done when there are minor children who are beneficiaries and the trust will be for their benefit until they turn a certain age. However, you have to speak to a tax professional to understand the important tax consequences of listing a trust as a beneficiary.
- LLC Interests: Limited Liability Companies are popular among business owners and real estate investors. Before you transfer an LLC interest into a trust, make sure that the operating agreement allows it. If it does, it is relatively simple to prepare the appropriate assignment documents and transfer your interest into the trust. When dealing with LLC’s owning real estate, take the same precautions regarding insurance and outstanding mortgages.
In addition, the trust should be reviewed to make sure it reflects your wishes and owns the assets which it was designed to. If you acquire additional assets in the future, they can usually be titled directly into the trust to save time and money. Anyone engaging estate planning should be commended for being responsible and protecting their loved ones when they pass away. However, just executing a trust is not enough; it must also be funded properly.