You have done more than the majority of people in the state of Michigan, you have an estate plan. And as part of that estate plan, you have a trust. When you had your trust drawn up, you were told that to make your trust work, it had to be funded. There was a quit claim deed transferring your home to your trust, but it was not recorded. You were given instructions that you needed to fund your trust yourself.
If you are like most people, you do not fund trusts every day. But, what is this funding of your trust and why is it important? Trust funding is completely and correctly designating your trust and individuals as owners, beneficiaries and insured parties of your assets. Basically, it’s putting your stuff in your trust.
The proper funding of your trust is critical in making your estate plan work and having the results you plan. Failure to properly fund your trusts may cause unintended results. These may include probate during your lifetime or after death; distributions not in accordance with your goals and objectives; additional taxes; and additional administrative, legal and other expenses.
I used to do trust based estate planning the same way. But in the first thirteen years of my practice, can you guess how many of my clients fully funded their trusts? If you said none, you would be right. Not one single one of my clients had completely funded his or her trust. Trust funding is detailed and tedious and oftentimes, life gets in the way.
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. So in 1999, I decided to change how we did estate planning and started doing fully funded trust based estate plans.
Now, fully funded trusts are the only type of trust based estate plans we do. We think this is so important, that in addition to other team members, we have a full-time Funding Coordinator in our offices whose sole duty is to make sure our clients’ trusts are properly funded.
In my twenty-nine years in the practice of law and preparing estate plans, I still have not found anyone yet who has been able to completely and correctly fund his or her trust on his or her own without proper assistance from the estate planning attorney.The following are just some of the funding mistakes that we 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; this cuts off the warranty of title 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.
- You did not notify your mortgage or home equity lender that you were going to deed your home into your trust, and your lenders called 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 large personal injury 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. After death it either has to go through probate, or does not follow the instructions in your trust.
- You did not record the deed for your home to the trust and it was lost or mislaid; your home must now go through probate after your death.
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 usually 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. Last year, I did a survey of probate attorneys. The most quoted fees of the vast majority of the attorneys for just the after death probate costs, was 5% to 10% of the value of the probate assets.
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. We have found in our practice that for fully funded trust based estate plans, the initial fees, annual update fees, disability costs and the after death administration costs combined, total less than 5% of the value of the assets.
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 and who give this advice without having reviewed your estate plan or any of your estate planning documents.
This happens so often, that we had to put a signs in our conference rooms for all our clients to see which read: “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 February 8, 2015 in The Times Herald newspaper, Port Huron, Michigan as: Self-funding your trust can be dangerous