You have your trust. You were told that to make it work, it has to be funded. Your estate planner maybe did a deed or a beneficiary designation, and then you were told that you had to do the rest of the funding yourself. You are not told how to fund your trust, just to do it. What you are also not told is how difficult and tedious trust funding can be.
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. Your trust is a vehicle, a financial vehicle. It’s like that new car sitting in your driveway. It sure looks great, but it isn’t going anywhere unless you put fuel in it. The fuel for your trust is your assets. To properly fuel your trust, it must be funded with those assets.
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.
This week, we will be discussing the top eight trust funding mistakes that I have seen in drafting and/or reviewing thousands of estate plans over the last thirty years.
Mistake No 1: Failure to Fund Trust
We regularly have people coming into our offices with unfunded trusts from other estate planners. In my thirty years of preparing estate plans, there has never been any trustmaker who has come into our offices with an existing trust that has been completely and correctly funded. If you are getting a trust-based estate plan, make sure your estate planner is an estate planning specialist who spends the majority of his or her time doing estate planning and will assist you in correctly and completely funding your trust.
Mistake No. 2: Self-Funding Your Trust
Funding your trust can be a long and tedious process. You have to retitle bank and investment accounts, real estate, life insurance and other assets. You also need to change beneficiaries on IRA’s, retirement plans, annuities and life insurance. And then your trusts have to be added as additional insureds on homeowners and vehicle policies. Everything then has to be verified with written confirmations. In my thirty years of preparing estate plans, I still have not found a single trustmaker 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.
Mistake No. 3: Following Trust Funding Advice From Your Banker, Tax Preparer, Financial Advisor, Insurance Agent or Register of Deeds
There is no shortage of persons willing to give you free advice on how to fund your trust. You may have been told by a banker, tax preparer, financial advisor, insurance agent, register of deeds or friend how you should title your property or accounts or who should be named a beneficiary. And this advice is usually given without having the benefit of reviewing your estate planning documents or discussing with you your goals and objectives of your estate plan. 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.” If this free advice is contrary to the instructions from your estate planner, follow your estate planner’s instructions and ignore the free advice.
Mistake No. 4: Naming Spouse as Primary Beneficiary of IRA’s and Retirement Plans
If you name your spouse as the primary beneficiary of your IRA’s and other retirement plans with your trust as the contingent beneficiary, your survivors would typically lose all of the benefits and protections of your trust after your death. So long as your trust is properly drafted as a designated beneficiary under the Internal Revenue Code minimum distribution rules, you should generally name your trust as the primary beneficiary of your IRA’s and other retirement plans, with your spouse or other loved ones as the contingent beneficiary. However, if your trust is not properly drafted as a designated beneficiary, 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’s and other retirement plans within five years of your death.
Mistake No. 5: Failure to Name Your Trust as Additional Insured on Homeowners Insurance
After you have recorded the deed to transfer your home to your trust, the owner of your home is now your trust. If 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.
Mistake No. 6: Using a Quit Claim Deed to Fund Real Estate to Trust
If you use a quit claim deed to transfer your home to your trust, instead of a warranty deed, this cuts off the warranty of title which can void your title insurance policy.
Mistake No. 7: Using County Website for Legal Description for Deed to Fund Real Estate to Trust
Do not use the legal description from the county web site. It is only a tax description and not necessarily a full legal description, and could result in only part of your property going in your trust.
Mistake No.8 : Failure to Update Your Estate Plan
Your estate planning documents should be updated on a regular basis. I generally recommend that your estate plan be reviewed on an annual basis. So why update? Well firstly, there are changes in your personal and family situation like births, deaths, marriages, divorces, illness, injury or disability of you or a loved one that can affect how you leave your stuff to your family. Secondly, there can also be changes in your financial situation, such as changing jobs, retiring or if you receive a sizeable sum of money such as an inheritance, personal injury award or lottery winnings which, this can affect the type of planning that you do. Lastly, there are also regular tax and non-tax changes in the law can also affect your estate plan.
A fully funded trust based estate plan will 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, all at the lowest predictable cost to you and those you love.
By: Matthew M. Wallace, CPA, JD
Published edited January 3, 2016 in The Times Herald, Port Huron, Michigan as: Top 8 trust funding mistakes