So you now have your trust. In addition to your trust, your 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 proper titling of your 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 is called “funding” your trust.
I believe in fully funded trusts. This means that all of your assets where possible, from bank accounts to investments to real estate, are titled into the name of your trust and/or your trust is named as the primary beneficiary or additional insured.
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 beneficiary designations on the accounts.
With retirement plans and annuities, we typically name your trust as the primary or contingent beneficiary, with your surviving spouse or children as a primary or contingent beneficiaries. 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 beneficiaries and your surviving spouse or children as contingent beneficiaries. If your life insurance policy is individually owned, rather than a group policy, 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 insurance policy. If there is a mortgage on your real estate, we either notify the mortgage company of the transfer or we obtain a waiver of the due-on-sale or due-on-transfer clause that is in the mortgage before we record the deed transferring the real estate into your trust.
Boy, this funding stuff sure seems complicated and tedious, and it is. 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. To properly fund a trust requires expert legal advice. Funding a trust is too important and usually just too complex and tedious matter for non-lawyers to tackle on their own.
We used to prepare our clients’ trusts and then let our clients fund their own trusts. However, after doing that for 13 years, we found that not one single client completed the funding of every asset into his or her trust. Some did get more done than others. Because of this, 14 years ago, we decided that we were not going to leave it up to our clients to not finish. So now when we draft a trust based estate plan, our office coordinates the trust funding process.
Often times estate planners will prepare your trust and intentionally not fund it. By leaving all of your assets outside of your trust, it creates a probate estate after your death requiring more legal work to probate those assets to put them in your trust.
You have to be very careful when amending your trust. I regularly see trusts of people who have updated their trusts, but instead of keeping the name of their old trusts, they have new trusts. For example, if you had a trust that was originally dated June 5, 2005 and you decide to re-do your trust on December 16, 2013, your new trust should be an amendment and restatement of your original trust. Your new trust should still be named the June 5, 2005 trust.
If you name your new trust the trust dated December 16, 2013, you could be in for a big surprise. You may have to re-fund or re-title all of your 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.
After your death or disability, any assets in the name of the old trust that you did not re-title into the name of your new trust, would be controlled by your old trust. This is because your old trust would still be the legal owner of those assets. And for those assets, all of the changes you made in your new trust would be ignored.
The best way to avoid this situation is to keep the name of your old trust when it is updated and you do a new trust. This way, 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, 2005 will always be properly funded no matter how many times you amend and restate your trust. When you amend and restate your trust in 2020, it would still be called your trust dated June 5, 2005.
Unfortunately, most estate planners do not embrace this “fully funded” trust philosophy, where the planner would take responsibility for following upon 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. Oftentimes, we have new clients come into our offices to have us amend their old trusts which we did not prepare. Many of these new clients believe their trusts are fully funded, when in fact they are not. In over 27 years, we have never found a trust of a new client that is fully funded.
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 an annual 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 disability 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, CPA, JD
Published edited December 15, 2013 in The Times Herald newspaper, Port Huron, Michigan as:The title of assets key to trust administration