The centerpiece for just about every estate plan is the revocable living trust. There are many kinds of trusts. Not every trust is the same. The concepts I am sharing in this article refer to a revocable living trust. Make sure you speak with a qualified estate planning attorney to discuss the funding of other types of trusts.
There are three basic steps to planning your estate: (1) meet with the attorney; (2) execute the documents; and (3) fund the trust. The first step is the hardest – setting up an appointment to meet with an estate planning attorney. Once you’ve taken that step and voiced your concerns and your wishes, the attorney will be able to create a plan for you. But that gets you only through the second step. There is still a crucial third step that, if overlooked, can create havoc for the most finely drafted plans. Your assets need to be funded into your trust. That’s right. Just because you sat down and signed all of your estate planning documents does not mean you are done. You have already hurdled the hardest step, so this last one needs to be followed through!
Unfortunately, I have had the family members of clients come to me when it is too late. I’ve had a grieving son come to me and ask: “Mom put this trust in place to avoid going through probate, so we are good, right?” Then, after reviewing the asset information, I have to tell him, “No. Mom opened this account in her own name, and because of the amount of money in it, we will have to go through probate, even though Mom had a trust.”
Those are the words I hate uttering.
So, what does it mean to fund a trust? Think of your trust like a box. The words of the trust form the sides of the box. In the beginning, there is nothing in the box. But it is designed to hold your assets. So funding the trust is the process of changing the names on your assets to reflect the trust name.
A properly, and fully, funded trust ensures not only that you will avoid the issues that a death probate may bring, but it also eliminates the need for a conservatorship. A conservatorship is a court proceeding enacted when you become incapacitated (i.e., you can’t handle your own finances). In the proceeding, the judge determines who should be in charge of your financial affairs. While these are premised on the best interest of the incapacitated person, oftentimes the judge is making a determination based on limited information, and the person you would have selected is not chosen. With all of your assets in the trust, you have already selected the person to be in charge of your financial affairs, and the courts will not get involved!
So to help break down the process a little, here is a summary based on the type of assets that you may have in your portfolio:
COMMON TYPES OF ASSETS
Real Estate: The biggest asset in many portfolios is your primary residence – your home. Your home needs to be transferred into the trust via a deed (that is recorded in your county’s recorder’s office). But don’t forget about the real estate you may have in other states. These pieces of property need to be transferred into your trust, via deed, or there is a risk that a probate will be opened in every state where the real estate sits. Since real property is a creature of state law, each state controls and regulates how it is held and how it passes in the event of a death. As such, if a property is not properly titled, the probate process under the laws of the state where the real estate sits, dictates how to transition that property to your heirs or beneficiaries.
Checking, Savings & Brokerage (Non-Qualified)
Your basic accounts, including your savings, checking and brokerage (stocks, bonds and mutual funds) have a relatively straightforward process. You simply contact your adviser and have them re-title or change the name on your existing account to reflect the name of your trust.
Retirement plans (401(k), IRA, 403(b) And Other Qualified Plans)
You have worked hard and saved for your retirement. And the good news with retirement plans is that you can put a beneficiary on the account, so it should avoid probate! The presumption is that the beneficiary designated on your plan is alive when you pass away. If the beneficiary is also deceased, the amount in the retirement account may be subject to a probate proceeding. But if your revocable trust is also qualified under the IRS regulations, the trust can and should be the beneficiary. The trust then distributes the retirement account to the beneficiaries of the trust, eliminating any risk of a probate. Further, through the creditor protections of a beneficiary trust, the inherited retirement account would not be subject to the beneficiaries creditors (i.e., it is protected!).
Like retirement plans, life insurance has beneficiary designations. But, once the insurance is paid out, that cash is now vulnerable to the creditors of the beneficiary. Naming the trust as the beneficiary helps ensure the proceeds are protected. And to provide more flexibility if you were to become incapacitated, the trust should be named as the owner of the policy, as well.
Annuities: Annuities are creatures of contract. The annuity contract governs much of what can be done, so it is important for clients to work with an attorney and financial adviser to find the optimal solution for their particular annuity. But the general rule would mirror the rule for life insurance: the trust should own the annuity, and it should be the annuity’s beneficiary.
Business Interests (Corps, LLC, partnerships)
Whether you have a limited liability company that holds your rental home, or your consulting practice, or have an investment that is structured as a partnership, your business interests are often an overlooked asset when it comes to funding your trust. Your ownership has a value. So that interest needs to be tied to your trust. Stock certificates should be re-issued in the trust name, LLC membership needs to be amended to reflect the trust as owner, and the partnership books need to be updated to show your trust as the partner. The actual process of doing that varies from entity to entity, so the corporate bylaws, or operating agreement, or partnership agreement need to be reviewed to determine what steps are required for your entity to change the ownership.
Other (savings bonds, time shares, collections, personal property, etc.)
And then there is everything else. And these are just as important to be thought about, and if necessary acted upon. Your collections and other personal effects are simply assigned to the trust (because, in general, there is no paperwork that shows you own your couch). But your U.S. savings bonds need to be reissued in the trust’s name. And don’t forget about those time shares! Are they deeded? Or is it a point system? Understanding this determines what steps need to be taken to fund those assets into the trust.
And remember, once the trust is fully and properly funded, you are not 100 percent done! There is a hidden fourth step – regular review. As you continue through the path of life, your assets may change (close an account, open an account, buy a vacation home, etc.), and with each of these changes you need to make sure the new asset is still properly funded into your trust. Periodic reviews are essential to ensure the plan you have put into place will work how you want it to, when it needs to be acted upon!