Trusts can be a helpful estate planning tool for those who do not want their assets to have to go through probate upon their death. A trust is a legal agreement where the creator of the trust (or the grantor) entrusts a trustee with the management of assets for the benefit of one or more beneficiaries. When the grantor dies or becomes unable to manage the trust, a successor trustee named in the trust takes over that role. From there, depending on what the trust entails, the trustee must administer the trust in the manner in which the trust prescribes. Some of the many benefits of a trust include:
- Probate avoidance
- Maintaining privacy
- Mitigating the chance of litigation
- Providing asset protection
However, it is important to note that if your trust is not properly funded, these benefits are not available to you.
What is trust funding and why it’s important?
Trust funding is the act of transferring your assets from you to your trust. This requires actually changing the titles of your assets from your individual name to the name of your trust. Some assets may not be able to be transferred to your trust, for example, an individual retirement account (IRA). Trust funding is pertinent, as merely executing a trust agreement alone is not sufficient to create a valid trust. If the trust funding component is not completed, the trust is not considered funded, and therefore, a valid trust has not been created. Thus, all assets will not be able to forego the probate process, which entirely defeats the purpose of creating a trust in the first place. Failure to fund a trust means that the grantor’s wishes, as laid out in the trust, will not be followed, and assets, as a result, will be administered pursuant to the laws of intestacy. A good example of the dangers of failing to fund your trust can be seen with the late Michael Jackson’s estate. Jackson created a trust to care for his children and other family and friends, but he never funded it. Unfortunately, this has led to very public and seemingly endless probate court battles between family members, the executors, and the IRS.
Different Ways to Fund your Trust
Different assets are funded to a trust in various ways. For personal property or any asset with no formal title or deed, a transfer document is used to transfer the ownership of the asset(s) into the name of your trust. It is good to be specific, but you can use broad categories (e.g., jewelry, furniture, clothing) so long as it is clear what you are referring to. If you are transferring something that is of especially high value, it would be helpful to list this type of item individually, just in case.
For bank accounts or any other financial account, each financial institution has their own policies and procedures with respect to the transfer of those financial accounts. Real estate will require the signing of a deed to transfer your interest in the property to the trust and then recording that deed with the county in which the property lies. Business interests such as partnerships and LLC’s can have different requirements than corporations. This largely depends on the operating agreement of the business interest and the requirements of your state. Usually, a transfer of business interest is effectuated by a membership interest transfer agreement or an amendment to an operating agreement to include succession language, which thereby funds your trust with your business interest upon your passing.
Trust funding is essential to making sure your assets end up where you want them to, vehicle ensuring your loved ones are taken care of without the requirement of court intervention. This can be a tedious process to navigate, but working with a knowledgeable Trusts & Estates attorney can allow the process to flow more seamlessly.