Updated: Apr 10
You may have heard that a trust needs to be funded, however, most people are unfamiliar with what that term means. Funding a trust simply means transferring your assets into your trust. You will need to either make ownership changes or beneficiary changes depending on the type of asset.
Changing Ownership. The most common asset that requires changing title is your home. Most couples own their homes as joint tenants with rights of survivorship meaning the surviving spouse owns the home after one spouse passes. However, upon the passing of the surviving spouse, the heirs are unable to sell the home because a probate is required to transfer title from the dead to the living. If title were transferred to the trust, the successor trustee can step in to maintain or sell the home without court involvement.
When reviewing estate plans, I often find the home is not owned by the trust because the prior attorney did not fund the trust or the client purchased a new home without titling it in the trust. I had a client approach me after her mother passed away asking why the county recorder said a probate was required even though her mother had a trust. Her mother’s trust was well-written, but the county records showed that the home had never been transferred to the trust. Even a well-written trust, if empty, is worthless.
Changing Beneficiaries. Beneficiaries of bank accounts, life insurance policies, and investment accounts matter. I had a client who wanted to set up an estate plan for her father after they returned from a family vacation. Her father passed away while she was gone and her whole family came back from their cruise early to take care of the funeral and expenses. Her father had a few thousand dollars in a bank account but had failed to list a pay-on-death beneficiary. My client spent more than half of what was in the account in probate costs to get access to the account.
Making your trust the pay-on-death beneficiary of your bank accounts is simple and makes it much easier for your heirs to access and distribute. A spouse should generally be listed as the primary beneficiary of a life insurance policy with the trust listed as the contingent beneficiary. This is extremely important if you have minor children and I will address this more fully in next month’s article. You have to be careful with retirement accounts because there are penalties for early withdrawals, and you don’t want to list the trust as a beneficiary if it will incur taxes and penalties.
To receive the benefit of your trust, it must be funded! If you have questions about your trust funding or would like to establish a trust, please give me a call!