What is Trust “Funding” and Why is it Important?

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Funding is the act of transferring your assets to your Living Trust. Think of a Living Trust as a bucket. Just as an empty bucket is of little value, even a well-drafted Trust is of little use unless it is “filled” with your assets. If you create a Living Trust but never get around to funding the Trust, then your unfunded assets will not be controlled by the Trust provisions .At best, the unfunded assets will be transferred to your Trust after you death by use of a “Pour-Over Will.” But such after-death funding generally requires that your Will be probated so that your executor will have legal authority to transfer your assets to your Living Trust. Since many people establish Living Trusts with the expectation that their estate will not require probate, relying upon the pour-over will to fund a Living Trust should be only as a last resort.

And even with a pour-over will you can’t be sure that all of your assets will make it into your trust after death. Most married people own the majority of their assets with a spouse as joint owners with rights of survivorship. Such joint ownership means that the assets will pass automatically upon one owner’s death to the surviving owner.

Likewise, assets such as retirement plans, annuities, and life insurance are contractual assets that pass to persons named on a beneficiary designation form. While such assets will not be subject to probate upon an owner’s death, the assets that pass to individual co-owners or successor beneficiaries will receive none of the valuable tax and personal planning protections that are available for assets passing under the terms of a trust.

Filling your trust “bucket” is accomplished by the process known as trust funding. Trust funding involves transferring title to the assets from your name (or from you and your spouse in the case of a joint account) into the name of the trustees of the trust. Funding is not a difficult task, but it requires attention to detail and persistence. It requires you to notify all of your financial institutions in writing of the proposed change. Most of the time, at least one follow-up communication is required to ensure that proper titling takes place.

The new name on the account is not listed as the “John Doe Living Trust.” Instead, title should be held by the trustee(s) in their fiduciary capacity, as follows: “John and Mary Doe, Trustees, or their successors in trust, under the John Doe Living Trust, dated June 1, 2015, and any amendments thereto.” A shorter version that will work in most cases would be “John and Mary Doe, Trustees, under the John Doe Living Trust dated June 1, 2015.”

Special care must be given for funding certain assets such as real estate, life insurance policies, IRA’s and other retirement assets. Retirement account ownership should never be transferred to a revocable trust, since a change of ownership will be deemed a distribution of the assets and cause the retirement account to be fully taxable. Instead, the trust may be named as either a primary or contingent beneficiary of the retirement account to provide maximum after-death flexibility.

If you have an existing trust, you should periodically review whether the trust is properly funded. And when you buy new assets, keep the titling issue in mind. If you are thinking of establishing a trust for the first time, be sure to work with advisors who are committed to the funding process so that all of your planning goals can be achieved.