I have received many questions regarding trust funding. One of the most common questions that I receive is “What is trust funding?” Well, trust funding is the proper naming of your trust or individuals as owners or beneficiaries of your assets and the proper naming of your trust as additional insured on casualty and liability insurance policies. Basically, trust funding is putting your stuff in your trust.
If you have a trust, it should be fully funded. If you do not fund your trust during your lifetime, it may have to be funded after your death through the probate court process. For most people, one of the reasons to have a trust is to avoid probate and keep their affairs private. What is the point of having a trust if you do not use it?
Your trust is a financial vehicle. Like a new car sitting in your driveway, it sure looks good sitting there. But if you do not fill it with fuel, it’s not going anywhere. Your assets are the fuel for your trust. If you do not name your trust as owner or beneficiary of your assets, your trust will go nowhere until maybe after your death through the probate court process. And that is only if you have a “pour over” will which pours your assets over into your trust. If you do not have a pour over will and your trust is not funded, none of your assets will follow the instructions in your trust.
Funding your trust could be as simple as doing an assignment of your household furnishings and personal belongings or “stuff” into your trust. Or it could be as complicated as real estate. Most real estate with a mortgage requires four steps or “funding transactions” to be properly placed or funded in your trust.
The first step is to notify your lender that you intend to transfer your real estate into your trust. Most all mortgages nowadays have a provision that states if you sell or transfer your real estate, the entire balance of your loan can be called due. This provision is called a “due-on-sale” or “due-on-transfer” clause. When the real estate is your home, the communication to your lender should include a notice that pursuant to state and federal laws, they cannot enforce the due-on-transfer clause after your home is deeded to your trust. When the real estate is not your home, you should request a waiver of the due-on-transfer clause from your mortgage lender. Some lenders may require a fee to get the waiver.
After the notice of transfer to, or the waiver of the due-on-transfer clause from, your lender, you then can transfer your property to your trust. This transfer should be by a warranty deed and not a quit claim deed. A warranty deed protects the chain of title and does not cut off your title insurance protection. And you should immediately record the deed at the register of deeds office of the county in which the property is located. Unrecorded deeds are often lost, mislaid, forgotten or destroyed, rendering them useless.
After the deed is recorded, you have to file a property transfer affidavit with your local assessor that the property is transferred and to continue the homestead exemption and current taxable value for your property. If you do not file the affidavit, you could lose your homestead exemption and/or the taxable value could be “uncapped” to the current State Equalized Value (“SEV”). The uncapping
isn’t a big deal if your taxable value is close to your SEV. However, if there is a big difference between the values because you may have owned the property a long time, failure to file the affidavit can result in substantial tax increases.
The last step in funding real estate into your trust is adding your trust (and your spouse’s trust) as additional insured(s) on your homeowners insurance policy. When you put your home into your trust and you then have a catastrophic loss such as a fire, if you haven’t named the trust as additional insured, your insurance may not cover you. Your home and contents would be owned by your trust, but you may be only individually named as insured on your homeowners policy. Your trust, the homeowner, is not insured. There have been cases in which an insurance company has denied a claim in just such a situation.
Your bank accounts, and investments such as CDs, brokerage accounts, stocks, bonds and mutual funds must be re-titled into the name of your trust. Some tax-deferred assets, such as IRAs, qualified retirement plans and certain annuities cannot be titled in the name of the trust without current income taxation of the entire account. For these types of assets, instead of re-titling them into your trust, we generally name your trust as the primary beneficiary and your spouse then the kids as the contingent beneficiaries.
As we have discussed in previous columns, there is no shortage of untrained persons willing to give estate planning advice about your trust, even without the benefit of reviewing your trust. We regularly have tax preparers, financial advisors, life insurance agents and representatives of banks and credit unions telling our clients they shouldn’t name their trusts as the primary beneficiary of these accounts.
If you do not name your trust as the primary beneficiary of these accounts, you bypass all of the instructions and protections of your trust and may have unintended results. These could include probate after your death; seizure of the assets by creditors of the beneficiary; distributions not in accordance with your goals and objectives; additional taxes; and additional administrative, legal and other expenses.
Similarly with life insurance, your trust should be named as primary beneficiary and your spouse then the kids as the contingent beneficiaries. With individually owned life insurance policies, we also change the ownership to your trust. We do this because in our experience, life insurance companies and other financial institutions are much more hesitant in dealing with a power of attorney holder than a trustee of a trust.
During your lifetime, your successors may need to deal with the life insurance company, such as to transfer the policy to loved ones to prevent the policy from being cashed in to pay for nursing home care. It is a whole lot easier with trustees, than it is with power of attorney holders. And it is done with all of the protections you put in your trust.
Vehicles may or may not be retitled into the name of your trust. In certain circumstances, your next of kin may be able to transfer the vehicles into their names after your death without the necessity of going through the probate court process.
Because of the importance of funding your trust, we fully fund all of the assets into the trusts prepared by our office. We have one full-time team member whose primary duties are to make sure our clients’ trusts are fully funded. In addition, we have other team members also assisting with trust funding.
With a properly drafted fully funded trust based estate plan, you are in control during your lifetime when 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, you can give what you have to whom you want, when you want, the way you want; all at the lowest predictable overall cost to you and your loved ones.
By: Matthew M. Wallace, CPA, JD
Published edited August 17, 2014 in The Times Herald, Port Huron, Michigan as: To fund or not to fund – that is the question