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 your trust is going to work? And you got your trust at a real bargain price. However, what you may not realize is that with estate plans, like most things in life, you get what you pay for.
You were told that you have to fund your trust. But what does that mean? Your trust is a financial vehicle. And just like a shiny new car in your driveway, it’s not going anywhere unless you fuel it up. The fuel for your trust is your financial and other 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 funding your trust.
Fully-funding your trust is critical in making your trust work and having the results that you intend, including avoiding probate and distributing assets in accordance with your wishes. Funding includes the proper titling of assets in the name of your trust or individual names and/or proper naming of your trust and/or individuals as beneficiaries and additional insureds on casualty and liability insurance policies.
Failure to properly fund your trust will cause unintended results, which could include probate, loss of trust protections, distributions not in accordance with your instructions and other than you planned, additional taxes and additional administrative and legal expenses.
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.
Another reason your trust may not be funded is that you may have focused on the up-front costs of your estate plan rather than the overall cost, both during your lifetime and after you are gone. With estate planning, there are costs all along the way. There are the up-front costs to draft your estate plan, or the costs of failing to plan. There are costs during your lifetime to update your plan, or the costs of failing to update your plan. There are costs upon your mental disability. And there are costs after your death. Estate planning is a lot like the Fram oil filter commercial, “Pay me now, or pay me a lot more later.”
Your assets will be eventually need to be transferred to your loved ones or other beneficiaries after you are gone. You can assist with the transfer during your lifetime by having a fully-funded living trust based estate plan. Or not.
A fully-funded living trust based estate plan may cost more up-front than an unfunded trust or a will based plan. However, what you may not realize is that the overall cost of a fully-funded living trust based estate plan to you and your loved ones during your lifetime and after you are gone, is substantially less than using an unfunded trust or a will.
Although an unfunded trust or will based plan can be real cheap to set up, they result in substantial fees after your death, including probate. Average probate costs in the U.S. are reported to be 3%-5% of the value of your gross estate, and that does not include other non-probate death administration costs.
I have seen probate and death administration costs of unfunded trust or will based plans often exceed 10% and occasionally 20% of the value of the gross estate. With fully-funded trust based estate plans, in our office, we regularly see total death administration costs less than 1% of the value of the gross estate.
So although a fully-funded living trust based estate plan may initially appear more costly than an unfunded trust or a will based plan, when you look at overall cost both to you during your lifetime and to your loved ones after your death, it is not more costly. The overall cost of a fully-funded trust based estate plan is typically a fraction of the cost of an unfunded trust or a will based plan.
In an effort to save up-front estate planning costs, you may be tempted to fund your own trust without the assistance of a qualified estate planning professional. This is unwise. In the last 27 years spent reviewing existing trusts of new clients, I have yet to find a trust that is fully-funded. Usually, very few or none of the assets are funded into the trust.
You may 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, which is basically the cleaning out of your financial “closets”.
Your financial closets are very similar to 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.
Fully-funding your trust during your lifetime very often provides the incentive to clean out your financial closets. You can consolidate, simplify and combine your financial assets to make it easier for yourself while you are alive and well and for your loved ones upon your mental disability or after your death.
You may have attempted to do your own mini-estate plan by naming loved ones as joint owners or as payable-on-death beneficiaries of your bank accounts and other financial assets. What you may not realize is that by using joint ownership or a payable-on-death beneficiary designations instead of using a trust, you may lose the protections of a trust. These include divorce protection, creditor protection, probate avoidance, family privacy, re-marriage protection, governmental benefits protection, addiction protection, disability protection, pet protection, cottage protection, incentive trust protection, greedy beneficiary protection, predator spouse protection, minor protection, beneficiary death protection, and many others.
Funding your trust can be a tedious and time consuming process which requires a lot of follow-up and follow-through. Because of this, we have a full-time team member in our office, whose sole responsibility is to assist our clients in the funding of their trusts. We often hear from our 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, and it’s their stuff.
It is during this process of fully-funding their trusts that our clients realize, that if they hadn’t done the work while they were alive and well, it would have been a whole lot more work to be done by someone else who didn’t know what they had or where to find it. By fully-funding your trust, you have done much of the work so that your loved ones don’t have to upon your mental disability or after your death; and the overall cost to you and you loved ones is substantially less.
By fully-funding your trust, you can make sure that you are in control of your property while you are alive and well; that you and your loved ones are provided for in the event of your mental disability; 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 June 30, 2013 in The Times Herald newspaper, Port Huron, Michigan as: Family-friendly options for Medicaid nursing home rules