What is a Living Trust?
A Living Trust is a vehicle created to hold and protect your stuff for your kids without court involvement. Trusts allow you greater control over what happens both during your lifetime and after your death. They protect your assets, which helps your loved ones avoid probate. Trusts also allow you to prepare in the event that you are no longer able to make decisions regarding your health.
What assets can you put into a Trust?
Common assets people put into Trusts are:
- Real property (homes or buildings they own)
- Financial accounts (checking and savings, non-retirement investments, stocks, cryptocurrency)
- Business interests, such as corporate stock, partnerships, or LLCs
- Personal property, such as vehicles, jewelry, collectibles, or artwork
What assets can’t or shouldn’t you put into a Trust?
- Retirement accounts e.g. 401k, IRAs (but talk to an experienced attorney about this)
- Health savings accounts
- Life insurance (also talk to an experienced attorney about this)
What is Trust funding?
After you create your Living Trust, you must transfer assets into it to ensure that they belong to the Trust, with you as the Trustee/Co-Trustee. This process is called funding your Trust. This step is essential; without it, your estate will likely require probate later on.
Note that funding a Trust is different from setting up a Trust Fund. Funding a Trust transfers ownership of assets to that Trust. Creating a Trust Fund allows you to manage your assets by specifying amounts of money or gifts that will go to certain people or causes, such as distribution of a college fund starting at a certain age, funds in event of a medical emergency, or annual charity donations.
How do you fund a Trust?
Different assets require different processes in order to be added to a Trust.
- Real property
- File a new deed with your County Recorder that says that you are transferring ownership of the property to a Trustee
- Financial accounts
- Fill out the appropriate forms with your bank
- The bank will change the owner of your account to the Trustee
- Note that your bank might require you to close your existing account and create a new one before you can put it under your Trust’s ownership
- Business interests
- Go over your business agreement to make sure you can retitle your interest or partnership
- Transfer interest to your Trust using an Assignment of Interest document
- Ensure that business partners are aware of the transfer and that the business agreement is updated
- Personal belongings
- Items that don’t involve paperwork/titles such as jewelry, artwork, family heirlooms, etc., can be listed directly in the Trust document
So, what happens if you don’t fund your Trust?
The time, money, and energy spent on creating a Living Trust would be wasted if your Trust isn’t funded properly. Not funding your Trust can lead to problems down the line:
- Assets may not end up with people of your choosing
- Not funding means that your assets are not protected by the Trust
- If your assets aren’t protected by the Trust, it’s not guaranteed that the beneficiaries in the Trust will receive funds or gifts
- Your estate may require probate
- Probate is often necessary if your assets aren’t protected in a Trust
- Probate can be costly and time-consuming for your family
- You might not be able to access your property in the future
- Even if you’re the Trustee of your Trust, you may lose access to your property that has not been properly transferred into the Trust; this also applies to Co-Trustees
- In the event of incapacity, the person you’ve appointed as your Power of Attorney, or a conservator, wouldn’t be able to manage any property outside of the Trust
In conclusion, funding your Trust is imperative to protecting your assets and making sure that your Trust does its job. Without proper funding, your Trust won’t function as a vehicle that allows you to pass your assets on to people of your choosing. This could also mean that your family will have to go through the probate process after you’re gone. In the event of incapacity, the person who is appointed to manage your estate might not be able to access your property on your behalf if it isn’t titled in the Trust.