A Guide to the Important Decisions When Funding Your Trust
You may be interested in creating a trust fund for a variety of reasons - privacy, minimizing taxes, providing for minor children, etc. No matter why or how you go about creating it, one of the most important considerations is how you fund the trust. It is important to make sure that your trust is correctly funded. If it isn’t, the trust may not accomplish what you want.
Funding your trust is a part of the process that you are directly involved in, even if you have a lawyer set up the trust for you. Many lawyers leave it to you to transfer your assets into your trust. This is where simple mistakes, or even failing to finish the transfers, can cause serious funding issues for your trust in the future. With that in mind, prepare yourself by learning what you need to know about setting, funding, and managing trusts.
Before You Begin, Consult a Lawyer
Before you begin the process of setting up or funding a trust, seek legal advice from a qualified lawyer or fiduciary. While our team can provide information to help you understand the trusts, this information should not be taken as legal advice. We provide it to help you prepare, but you should consult a trust professional for advice about your specific situation.
The best way to make sure that you have the correct legal systems and protections in place is to consult a legal and/or financial representative who specializes in trusts and trust management. That way, you receive legal and financial advice that takes your situation into account so that you can move forward without problems and have the right support along the way.
A Few Words About Trusts
Trusts are not just for the rich. Anyone can set up a trust to manage their assets, provided that they have the resources for the legal process and assets to put into the trust. There are no limits to the size of a trust, so it can be as small as a few hundred dollars or as large as the Biltmore Estate in North Carolina. It all depends on what you want to put into it and why you want a trust in the first place.
What is a Trust?
A trust is a legal vehicle for protecting assets, which is often used to transfer ownership of those assets to family members after death. In simple terms, a trust lets you separate your assets from yourself, like how creating an LLC separates a business from the founder.
You can still manage those assets by managing the trust, but you don’t own them. This makes it easy to transfer the entire trust, including all of its assets, to someone else when you cannot manage the trust anymore.
What Can You Use a Trust For?
Having a trust is a great way to keep the details of your estate private, control cash flow to your heirs, avoid or minimize estate taxes for some, and make cash available to your heirs (whether they are minors or not) in order to manage your estate or family business.
A trust can also allow you to provide for a spouse in a second marriage without disinheriting children from the first, and protect the inheritances of your children and grandchildren from creditors, spouses, courts, and from themselves.
Irrevocable Trusts vs. Revocable Trusts
When you set up a trust, there are two main types to choose from that will have a big impact on how the trust is managed and funded: Revocable trusts and Irrevocable Trusts. Which one you choose will largely depend on your ability to manage the trust and your reason for setting it up.
Irrevocable Trusts
An irrevocable trust is permanent. Once it is set up, you lose most control over the trust and generally cannot make changes to it. Think of it as the type of trust where you set up an inheritance that is funded and left behind for your child to access when they turn 25.
The trust continues to exist, is funded, and managed even if you are not there to do the work yourself. Also, you cannot make changes (except under specific circumstances under the law), so you can’t take it back once it is established. Once you fund an irrevocable trust, you give up ownership and control of the assets and/or funds.
Irrevocable trusts can be used for very specific tax planning, beneficiary protection, or asset protection purposes. Irrevocable trusts are not usually used as a basic estate planning tool.
Revocable Trusts
Revocable trusts can be modified after they are established. Once you set it up, you can still make changes to it or get rid of it altogether. Think of it as a temporary version of a trust that you can use and then disband if the need for it goes away.
The ability to make changes also lets you adapt to changes in your situation over time, which is great if you are going to have the trust for a long time. Most people prefer to set up revocable trusts for their basic estate planning that can be modified according to changes in their situation.
Funding Your Trust
Funding a trust means turning over assets to the trust. The trust takes ownership of those assets, like how a corporation can own its building, bank accounts, cars, and other assets. The trust owns and manages those assets, meaning you, as an individual, no longer own those assets. You can fund your trust with most types of assets.
The exact method of transferring the asset to the trust will depend on the type of asset. Most assets can be transferred by giving them over to the trustee, the person who manages the trust. With the trustee’s name on the assets, they become a part of that trust. For example, you can
- Change the title of a house to name the trust and the trustee as the owner
- Using an Assignment of Gift or Deed of Gift for a vintage watch collection, which transfers non-titled assets to the trustee
- Turning bank accounts or the family home into Transfer on Death (TOD) assets with the trustee as the beneficiary
Work with your legal representative to determine the right way to set up assets for a transfer to a trust. That way, you can minimize the chance of having problems once you are ready to fund the trust.
What Happens If My Trust is Not Funded?
Creating and funding a trust are two separate processes. Failing to transfer assets into the trust at all makes it ineffective. For example, creating a trust to handle an inheritance can make the inheritance process easier by avoiding probate court and directing assets to the right people. If you don’t put the assets into the trust, then the trust can’t do anything to protect them from probate, creditors, or fights over the inheritance between family members. In short, not funding a trust means it can’t do anything to protect your assets. It just sits there unfunded and ineffective.
Fortunately, you can avoid this problem by either funding the trust right away after it's established or by creating a pour-over will. A pour-over will directs your executor to transfer any assets inadvertently not placed in trust to the trust after death.
That said, even though assets not specifically transferred to the trust may be covered by your pour-over will, they will probably have to go through probate first, which can be time-consuming and expensive. If one of your intentions in creating a trust is to avoid probate, then you need to make sure that the asset is actually in the name of the trust (or that it will transfer immediately on your death).
The best solution is to work with your lawyer to finish the transfers once the trust is ready. You can avoid all of these issues and the need for backup plans if you just handle the transfers right away.
Making Sure Your Trust Stays Funded
After you initially fund your trust, you should review your accounts and the terms of your trust periodically to see if you need to make any changes.
If you purchase or refinance a home, for example, some banks may require the property to be in your name, not the name of the trustee. So, if you purchase or refinance and the home is an asset you want in your trust, you need to make sure that the home is transferred to the trust once financing arrangements have been completed.
Transferring Assets to Your Trust
Transferring assets into a trust can be a complex process when you have a lot of individual assets to transfer. However, this step is essential in making your trust effective. There are a few things that you can do to make the process easier for you to manage, as well as to make it less stressful if you are under time constraints.
Prioritize Your Assets
Start with the largest asset and work your way down to the smallest. That way, you get the most important assets into the trust first in case something happens, and the rest of the assets are delayed or forgotten. Assets that you can re-title in the name of your trust include:
- Bank/savings accounts
- Investments (non-IRA and non-401(k)) and brokerage accounts
- Business interests (depending on whether or not the business allows this)
- Real estate