So you have your trust based estate plan. In addition to your trust, your trust based estate plan should also include, at a minimum, your financial and healthcare powers of attorney and your pour-over will.
Your financial and healthcare powers of attorney will allow your appointed agent to make financial, healthcare and other personal decisions for in the event that you are unable. Your pour-over will is mainly a backup plan so that if something is not in your trust at the time of your death, it will get into your trust or be poured-over into your trust by your will through the probate court process.
But having your documents signed, sealed and delivered is not enough. Your trust based estate plan is like a new car. It may look real nice, but if you do not fuel it up, you are not going to go anywhere. The fuel needed to get your trust moving along is your assets.
Your assets must be properly titled in the name of your trust or have proper named beneficiary designations in order to gain all the benefits of your trust. The titling of your assets into your trust or changing your beneficiary designations is called “funding” your trust.
I believe in fully funded trusts. This means that all of your assets, where possible, are titled into the name of your trust or your trust is named as the primary beneficiary.
So how do you fund your trust? Now here comes the dreaded legal answer, it depends. It depends on the types of assets with which you are dealing.
With cash accounts, CDs, stocks, bonds, mutual funds and brokerage accounts, we typically title the assets directly in the name of your trust and remove any payable on death or transfer on death designation on the accounts.
With retirement plans and annuities, we typically name your trust as the primary or contingent beneficiary, with your spouse or children as a primary or contingent beneficiary. Which is primary or contingent depends on the terms and conditions of the retirement plan or annuity.
We generally change the beneficiaries on your life insurance policies to your trust as the primary beneficiary and your surviving spouse or children as contingent beneficiary. If your life insurance policy is individually owned, we also change the ownership of the policy into your trust.
We will typically deed your real estate into your trust, file a property transfer affidavit exemption form and add your trust as additional insured on your homeowner’s policy. If there is a mortgage on your real estate, we need to obtain a waiver of the due-on-sale or due-on-transfer clause that is in the mortgage before we can record the deed transferring the real estate into your trust.
Boy, this funding stuff sure seems complicated and tedious, and it is. Most people do not know how to properly fund a trust without expert legal advice.
I used to let my clients fund their own trusts because they thought they could save money on legal fees. However in the first 13 years of my practice, guess how many of my clients fully funded every asset into their trusts? If you said none, you are right. Not a single one of my clients had fully funded their trust. Some did get more done than others.
You may have been told that funding your trust is no big deal and you could do it on your own. My experience is otherwise. Funding a trust is too important and usually just too complex and tedious matter for non-lawyers to tackle on their own. Because of this, a little over 10 years ago, I decided that I am not going to leave it up to my clients. So now when I draft a trust based estate plan, my office coordinates the trust funding process.
Often times attorneys will draft trust based estate plans and purposely not fund your trust. By leaving all of the assets outside of your trust, it creates a probate estate after your death and more legal work to probate those assets to put them in your trust.
What if you are amending your trust? I regularly see the new trust of people who have changed their trust, but instead of restating their old trust, they have a new trust. For example, if you had a trust that was originally dated June 5, 1995 and you decide to re-do your trust on May 30, 2010, your new trust should be an amendment and restatement of your original trust. Your new trust should still be named the June 5, 1995 trust.
If you name your new trust, the trust dated May 30, 2010, you could be in for a big surprise. You may have to re-fund or re-title all of the assets from your old trust to your new trust. All of your accounts, beneficiary designations, life insurance policies and all other assets would have to be changed.
If you do not re-title your assets into the name of the new trust, upon your death or disability, the old trust would control. This is because your old trust name is listed on all of your assets. All of the changes you made in your new trust would be ignored.
The best way to avoid this situation, is to do a full amendment and restatement of your old trust. If you do this, you do not have to re-title any assets except those assets that were never titled properly in the first place. Any assets that are titled in the name of the old trust dated June 5, 1995 will always be funded no matter how many times you amend and restate your trust. When you restate your trust in 2020, it should still be called your trust dated June 5, 1995.
Unfortunately, most attorneys do not embrace this “fully funded” trust philosophy, where the attorney would take responsibility for the funding of your trust. Often times all you will get is a letter of instruction saying you should put all of your assets in your trust and if you do not, your trust may not work.
This is less an instruction letter than a “CYA” or “cover your asset” letter protecting the estate planner from liability for an unfunded trust after your incapacity or death.
Often times, I have new clients come into my office to have me amend their old trust which I did not prepare. It is rare that I find these trusts fully funded. Many times these new clients tell me that everything has been funded into their trust, when in fact it has not. They are given the impression by their previous estate planner that it was all completed.
Even if you have your trust properly funded when you set it up, it does not mean that you are all set. Trusts tend to get un-funded over time. As time goes on, you forget about your trust when you buy that time-share, open up that new bank account or buy a Certificate of Deposit. If you purchase those assets in your sole name, those assets will generally be subject to the probate court process.
If you have a trust, you should do a funding review on a regular basis, preferably with your estate planning attorney to make sure that all of your assets are properly funded into your trust. By having a properly fully funded trust, you can be assured that you are in control while you are alive and well, you and your loved ones are provided for in the event of your mental incapacity and when you are gone, to give what you have to whom you want, when you want, the way you want.
By: Matthew M. Wallace, CPS, JD
Published edited June 6, 2010 in The Times Herald newspaper, Port Huron, Michigan as: Properly titled assets key to trust administration