You brought home your brand new trust. It sure looks great. It may be in a shiny new binder with tabs and everything. But how do you know it is going to work?
Your trust is a financial vehicle, and just like your new car in your driveway, it’s not going anywhere unless you fuel it up. The fuel for your trust is your financial assets. In order for your trust to work, you have put your stuff into it. This putting of your stuff into your trust is called trust funding.
Different assets require different funding techniques. Bank accounts, investment accounts and real estate are typically re-titled into the name of your trust. With retirement assets and annuities, you usually change the primary beneficiary to your trust. For other assets such as life insurance, you not only re-title the assets in to the name of your trust, you also change the primary beneficiary to your trust.
Review your assets. Have they been fully funded into your trust. In the last 25 years spent reviewing existing trusts of new clients, I have yet to find a trust that is fully funded. I usually find very few or none of the assets funded into the trust.
One of the main reasons you may have done a trust based estate plan is probate avoidance. But if you have not funded your trust, you have not avoided probate. If your assets are still in your name, they will have to be probated after your death to put them in your trust.
There are many reasons that your trust may not be funded. You may have not been told that in order for your trust to work, your assets must be put into it. You may have only been given limited instructions about funding your trust. Or your estate planner may have done some limited funding such as preparation of a deed to your home or other real estate, but left you to fend for yourself for the rest of your funding.
You may have not funded your bank accounts into your trust because you wanted to keep one of your children’s names on the accounts so that when you were on vacation or were in Florida or Arizona for the winter, your child could pay your bills. What you may not realize is that you can add additional signers to any of your trust accounts, IF your trust allows for it.
In your effort to treat all of your children equally and even though you have a trust, you may have attempted to do your own mini estate plan by opening a bunch of accounts or CDs and naming your children as joint owners or as payable on death beneficiaries.
What you may not realize is that by having those assets go directly to your ultimate beneficiaries through joint ownership or a payable on death beneficiary instead of going through your trust, you lose all of the protections of your trust. These include divorce protection, creditor protection, re-marriage protection, governmental benefits protection, addiction protection, disability protection, pet trusts, cottage trusts, incentive trusts and many others.
By titling your bank accounts into the name of your trust, you can have all these protections. You can also avoid the pitfalls of joint ownership, such as when your joint owner gets mad, gets greedy, gets sick, gets sued or dies in the wrong order. Similarly, you can avoid the pitfalls of beneficiary box planning such as when your beneficiary gets sick, gets sued or dies in the wrong order.
Another reason your trust may not be funded is that you may have focused on the up-front costs rather than the overall costs. A fully funded living trust costs more up-front than an unfunded trust. However, you may not realize that a fully funded trust ends up being much cheaper in the long run in the event of your incapacity or upon your death.
You may also have fully intended to fund your assets into your trust, but life just got in the way. There may have been children’s or grandchildren’s concerts or sporting events. Major life events such as births, deaths, weddings or divorces can also delay your funding. You or a family member may have been ill. The funding just gets put on the back burner and you hope to get to it someday. But just like cleaning out your closets at home, you just don’t seem to ever get to complete the funding of your trust or the cleaning out of your financial closets.
Your financial “closets” are very much like your closets at home. During your lifetime you have accumulated a lot of stuff. That stuff just gets put away but does not necessarily get organized and soon your closets become full. Occasionally you will clean them out, but on average they are still full of stuff. Just like you clean out your household closets or attic, you should also regularly clean out your financial closets. Funding very often provides the incentive to clean out your financial closets. Just like you would clean out your attic or your closets at home, you would consolidate, simplify, combine your financial assets to make it easier for yourself or for your successors either during your incapacity or after your death.
Funding your trust can be a tedious and time consuming chore which requires a lot of follow up and follow through. I often hear from my clients about how much work it is to gather and assemble all of their asset documentation and then to follow through with their trust funding, when it is their stuff. It is after this that they realize that if they hadn’t done the work while they were alive and well, it would have been left up to someone else to do who didn’t know what they had or where to find it. By funding your trust, you have done a lot of the work ahead of time so that your loved ones don’t have to do it upon your incapacity or death.
When I am preparing a trust for a new client who has never had a trust before, I only do fully funding living trusts in which I will coordinate the funding of all of assets to make sure that they have been properly funded into the trust. By properly funding your trusts you can make sure that you are in control of your property while you are alive and well and your loved ones are provided for in the event of your mental incapacity and when you are gone, you can give what you have to whom you want, when you want, the way you want.
By: Matthew M. Wallace, CPA, JD
Published edited July 31, 2011 in The Times Herald newspaper, Port Huron, Michigan as: Trusts need plenty of tender, loving care