By itself, having a living trust document drafted and notarized will not effectuate the beneficial intentions of your estate plan. The problem is that a living trust will only accomplish your goals if you properly “fund” it. You have to actually put assets into the trust, so that these assets become subject to the terms of the trust instrument. The process of transferring assets into the name of the trust is known as “funding” the trust.
Trust Funding Is Not Always Included With Trust Drafting
Unfortunately, many of the firms which draft trusts do little to assist their clients with trust funding, with the result that the client’s estate planning expectations do not come to pass. These firms ceremoniously give their client a handsome binder containing numerous important-looking documents, and assure them that those documents will do the trick. The attorney (or paralegal) may mention something about “trust funding”, and point out a page at the back of the trust upon which the client is supposed to list the trust assets. However, after the client takes the binder home and starts to fill out this page, questions arise: “Well…which things should go in the trust and which should not? Is it enough to list things here or do I need to do something more? I wish I understood more about this.”
Consequences of Failure to Properly Fund
Creation of a living trust document is only part of an effective estate plan. For the plan to be effective it is equally important to ensure that the assets are properly treated. It may not be appropriate for all assets to be placed in the trust. Further, different classes of assets must be placed in the trust by different means. For some assets, simply listing them on the “trust asset” page will be sufficient to transfer them into the trust; for many other important assets, that is simply not enough. These assets must be formally placed in the trust by transferring title to the asset from yourself as an individual to yourself as trustee of the trust.
For instance, assume you have a joint bank account in the name “John Doe and Mary Doe”. The account must be changed so that it goes into the name of “John Doe and Mary Doe, Trustees of The John and Mary Doe Living Trust”. If you don’t do this, the account will remain a “joint account”, which means that, instead of the proceeds being distributed as you have planned in the trust document, the proceeds will simply go to the surviving spouse as their individual property. This may result in unintended consequences. The estate plan may have assumed that the account proceeds were to go into a bypass trust[*] specially set up to use the decedent spouse’s estate tax exemption. If, instead, the account goes to the surviving spouse directly, rather than into the bypass trust, the decedent spouse’s exemption may be lost, and the surviving spouse may not have sufficient exemption of their own to shelter the entire estate. As a result, taxes may become due which could have been avoided.
Or take, for example, real property assets. Real property must be formally transferred into the trust by deed. If this is not done, that real property would have to go through Probate: this would be costly and would delay when the beneficiaries could receive their inheritance. I can’t tell how often failure to transfer a property into the trust results in added expense and distress upon the death of a settlor[†]. Real property, time share ownerships, bank accounts, brokerage accounts, business interests, other investments, and all large value personal property, e.g., a motor home, boat or plane, all should be formally transferred into the name of the living trust by various means.
On the other hand, as seen, some assets should not be placed into the Trust at all, and it would be a mistake to put them in. For example, in many instances a small bank account should be left outside of the trust so that there will be a modicum of immediate financial resources for the survivors when the settlor passes away. Also, in many cases, pensions, retirement accounts and life insurance policies are intended to be distributed directly to the beneficiaries named in those instruments; placing them in the trust would have negative consequences. For instance, the IRS allows many pensions and retirement accounts to be rolled over into the name of the beneficiary, instead of being paid in a lump sum payment, which avoids the tax consequences of immediate possession of the full amount of the asset. A lump sum payment of hundred of thousands of dollars may be disastrous.
Proper Trust Funding
When I draft an estate plan, my practice is to thoroughly discuss with the client which assets should or should not be placed in the Trust, to advise the client which assets need to be formally transferred, how each class of assets is to be transferred, and also to assist the client in carrying these transfers out. To do anything less is irresponsible in my book. Yet, I find that it is the standard practice of many firms to just give the client the binder and show them the door.
We start by ascertaining exactly what you own, by creating a thorough list of all of your assets, and discuss which should go into the trust and which should not. Once we have identified those to be transferred to the trust, we prepare formal Exhibits which list those trust assets to be included in the trust, and attach these exhibits to the trust. I think this is preferable to simply telling you to do it. This list can form a checklist which can be utilized to ensure that everything that is supposed to go into the trust is transferred.
Basic personal property (furnishings, etc) may simply be listed; that is sufficient to transfer them. Next we look at real property: this must be formally transferred by deed. Having a deed prepared may be a daunting task for people unfamiliar with real estate procedure. To make this easy, we provide deeds to transfer real property, and assist in having these notarized and recorded in the official county records. We also assist with subsidiary documents which county assessors need and which – if not done – may lead to reassessment.
When bank or brokerage accounts are involved, we review the periodic statements to see what name the account is in. If it is not in the name of the trust, the bank or the brokerage company must be contacted: they will have forms which can be filled out, notarized and returned to the institution in order to make the change necessary to place the account in the name of the trust.
As these changes are made, you can use the list attached to the trust as Exhibits to see that everything is accomplished. Also, when you open new accounts or purchase new real property, make sure you start by opening those accounts or having the property transferred in the name of the trust (if that is intended), and remember to add them to the list. Failure to do so will not prevent them from being in the trust so long as they are properly created or transferred in the trust name – but it is good to keep the list updated for your records. This will also assist the successor trustee, so they will have a complete list to work form at your death upon your death.
Additionally, I make it a practice, when having the discussion about which properties are to go into the trust and which are not, to nag my clients about the properties which are not going into the trust but have beneficiary designations. Trust creation provides an opportunity to check that the beneficiary designations are up to date, correct and in-line with the decisions made about the estate plan. The initial designations made when you first got a job, or took out a life insurance policy, may no longer be appropriate.
If you happen to have had the misfortune of having a trust drafted but were not assisted in funding it, and some of the funding remains to be done, we would be more than happy to help you ascertain what needs to be done and help you do it.
A living trust document is only part of a complete estate plan. All of the assets in an individual’s estate need to be reviewed, appropriately addressed in the living trust, or planned for accordingly outside of the trust. This ensures that the assets are passed on as the individual wishes, with estate and income tax consequences considered, and in a form which will assist in the eventual administration of the estate.
[*] A bypass trust is one of several types of subtrusts which might be created under the overall trust. A bypass Trust is aimed at segregating assets which are to go directly to beneficiaries other than the surviving spouse, so that the decedent spouse’s estate tax exemption will be used upon their death, and not be lost.
[†] A “settlor” is what the law calls the person who is making a trust and placing (“settling”) their property into it.