For those of you interested in creating a trust, you may have been told that one of the most important things to do after creating your trust is to fund it properly.
If you don’t, it’s like having an empty box.
The term “funding a trust” refers to the process by which you change all the assets you own into the name of the trust. Of course, there are some assets that you will not change into the name of your trust because by doing so you will incur greater taxes in all likelihood. Your lawyer will better advise you on which assets to transfer once you have identified those assets.
Why do assets need to be re-titled into the name of your trust? For the simple reason that if you don’t, then the assets will need to pass through the probate system before they can be distributed. Assets that are held in a trust do not pass through probate. It’s basically that simple.
Below are some of the most common mistakes people make when funding their trust:
- They expect the lawyer to do it. Be careful when you sign up for an estate plan with a lawyer who tells you that funding is included. Unless you are paying more for it, the funding the lawyer is talking about is usually very limited. Many lawyers will send a simple one-page letter on their letterhead instructing the financial institution at issue to change title to your trust. What generally happens is that the financial institution either entirely ignores the letter or shreds it into pieces. The reason is that almost all financial institutions these days require their own set of documents and forms to be filled in order to change title. In fact, for just one account, there may be several different forms that the financial institution requires each spouse to fill out. Obtaining these forms can be a nightmare, and many law firms do not do a comprehensive job in ensuring that your assets actually get transferred (e.g., following up with the institution weeks and months later). Properly funding a trust can take several months to get written confirmation of all changes to your assets.
- Not funding all assets. The definition of an “asset” for purposes of estate planning can be deceiving. What most people consider an asset is different from what an estate planning attorney considers an asset. For instance, a homeowner’s policy is an asset that should be retitled. You do not want to give the insurance company a technical reason not to cover your claim. Furthermore, many people forget they own certain assets because they were obtained too long ago. Or, some individuals just procrastinate thinking they will sell the asset so there is no need to transfer it. Years pass and then when the person dies, it turns out the asset was never funded.
- Not funding your businesses. Families who own businesses, whether corporate shares or LLC interests, must transfer those interests into the trust as well. If they do not, it can lead to a host of problems after their death, including dragging the business through probate, which would affect the other partners of the business as well.
- Not updating their trust when their assets change. After making a trust, assets will usually change. People buy and sell property and make changes to their financial portfolio regularly. As they do this, it is incumbent that the family regularly updates the funding of these assets. If they do not, those assets will fall into probate.
Can people fund their own trust? They absolutely can, but most people still prefer their attorneys to do that. Why? First, it takes a whole lot of time that most people do not have. Second, funding requires meticulous attention to detail and some knowledge of law, banking, forms, deeds, titling, real estate and the proper conveyance instruments. Most people lack the knowledge to get all of their property transferred. Third, banks, title companies, mutual fund companies, motor vehicle departments, stock brokerage firms, corporations, closely held businesses, insurance companies and other large institutions that hold your assets are notorious for their inability to provide simple customer service. Often the customer service person you talk to doesn’t understand living trusts or gives you wrong advice. Therefore, these institutions often times are unable to help you with the necessary paperwork to transfer assets you hold with them to your trust. In many cases these institutions actually give erroneous advice and thwart your efforts to fund assets into your trust.
Funding your trust and regularly updating your trust are absolutely critical steps to creating a trust. Documents are just step one; the real planning comes after that.