You had been meaning to get your estate plan done for years. You finally get up the nerve to call your lawyer’s office to have it drawn up. You walked out of the office with an estate plan in which your revocable living trust is at the core. You may even have been given a deed putting your home in the trust.
You were told that you have to fund you trust, or maybe you weren’t. But what is funding? Funding is the titling of your assets consistent with the instructions you have left in your trust. Funding includes the proper naming of your trust or individuals as owner or beneficiary of your assets and as additional insureds on your liability insurance policies.
The funding of your trusts is critical in making your trust work and having the results that you anticipate. Failure to properly fund your trusts will cause unintended consequences, which could include probate, distributions not in accordance with your instructions and other than you planned, additional taxes and additional administrative and legal expenses.
The following are just some of the funding mistakes that I regularly see when a trustmaker tries to complete the trust funding on his or her own without the aid of a qualified estate planning professional:
Instead of a warranty deed, a quit claim deed is used to transfer your home to your trust, which can void your title insurance.
When you did the deed to your trust, you used the tax description from the county web site, which may not have the complete legal description resulting in only part of your property going in your trust.
A property transfer affidavit claiming an exemption is not filed with the local assessor after you record your deed to the trust and your real estate taxes could go up, even doubling or tripling.
Your mortgage and home equity lender did not give you permission to transfer your home out of your name as borrower; because you deeded the home into your trust, your lenders now could call the entire balance due on your loans.
After you have recorded the deed to transfer your home to your trust, the owner of your home is now your trust. Because you did not add your trust as additional insured on your homeowners insurance, your insurance company now has an excuse to deny your claim for a fire or other catastrophic loss. You name your spouse as the primary beneficiary of your IRA and other retirement plans and name your trust as the contingent beneficiary. This typically results in the loss of the protections of your trust after your death.
Or you do name your trust as the primary beneficiary of your IRA and other retirement plans, but your trust is not properly drafted as a designated beneficiary under the Internal Revenue Code minimum distribution rules. This results in the loss of the “stretch out” of the distributions over the lifetimes of your beneficiaries. If this happens, your successors have to withdraw everything out of your IRA and other retirement plans within five years of your death.
Because you only changed the beneficiary of your life insurance to your trust, but did not change the ownership to your trust, your successor trustee has no right to access the life insurance policy during any period of your disability.
You decide to keep your car in joint ownership with your spouse. If you cause an accident with your car which injures or kills someone and get a Sam Bernstein judgment against you in excess of your insurance, that judgment can be satisfied from your and your spouse’s entire marital estate, instead of only those assets in your own separate trust.
Your bank or brokerage account does not get properly titled in the name of your trust because the bank or broker did not follow your instructions or they knew better on how it should be titled.
In my twenty-six years in the practice of law and preparing estate plans, I have not found anyone yet who has been able to properly complete the trust funding on his or her own without proper assistance from the estate planning attorney.
So what do you do to complete the funding of your trust correctly? You pay your estate planning attorney to assist you to properly fund your trust. And do not be surprised at the initial cost. In most cases, it will cost more to fund the trust than it does to draft the trust in the first place. This is because there is a whole lot more work necessary to fund your trust than to draft it.
But if you don’t properly fund your trust during your lifetime while you are able, it may cost even more to do it after your disability or death, and you could also have some of these unintended results. It is like the old Fram oil filter commercial, “Pay me now, or pay me a lot more later.” It is actually cheaper overall to pay your estate planning attorney to assist you with the funding of your trust at the outset, than to attempt to do it on your own.
I believe in fully funded trust based estate plans to keep you in control while you are alive and well, provide for you and your loved ones during your mental disability and give what you have to whom you want when you want the way you want. I think this is so important that we have a full-time Funding Coordinator in our offices whose sole duty is to make sure our clients’ trusts are properly funded.
Do not be surprised if you get lots of free advice from bankers, insurance agents, financial advisors and others who will be more than happy to assist you in the funding of your trust. I regularly fix funding errors resulting from trustmakers following this free estate planning advice from people who are not estate planning professionals.
This happens so often, that I had to put a sign in my conference room for all my clients to see which reads: “When doing your homework, please follow our instructions. If instead, you follow the advice from Bankers, Financial Advisors, Insurance Agents, Register of Deeds or other Advisors, it will cost you more money.”
The wisest choice is to just bite the bullet and pay to have the funding of your trust done right the first time. If done once correctly the first time and your trust is properly maintained, your wishes will be followed at a lower overall cost to you and your loved ones.
By Matthew M. Wallace, CPA, JD
Published edited April 1, 2012 in The Times Herald newspaper, Port Huron, Michigan as: Funding critical to make trusts work