We had one of our clients in this week for a trust review. She said that estate planning and trusts have been regular topics of discussion with her friends. They all have trusts which have been drafted by different attorneys. She said that she has told them that their trust won’t work as intended unless they put their stuff in it. This is called trust funding.
She said that not a single one of her friends have funded their trusts. Some of her friends were never told by their estate planner that they needed to put their stuff in their trust. And other of her friends were told by their estate planner that they needed to put their stuff in their trust, but they just never got around to it. None of her friends used an estate planner that made sure that their trust was fully-funded.
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.
You have to re-title your bank and investment accounts, stocks, bonds, individual life insurance policies, business interests, real estate and sometimes vehicles into the name of your trust. You also need to name your trust and individuals in the proper order as beneficiaries of your IRAs, retirement plans, annuities and life insurance. And you have to make sure that your homeowners and other casualty and liability insurance policies name your trust as insureds.
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.
A 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 costs, 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.
A fully-funded trust-based estate plan will cost more up-front than an unfunded trust or a will-based plan. 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. Although an unfunded trust or a will-based plan can be real cheap to set up, they result in substantial fees after your death, including probate.
Not too long ago, I did a survey of probate attorneys across the state and the nation. 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. I have seen probate and death administration costs of will-based plans or unfunded trust-based plans 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 trust estate. We have found in our practice that for these fully-funded trust-based estate plans, the overall costs, including the initial fees to set up the plan, annual update fees, disability administration costs and the after death administration costs all combined total less than 5% of the value of the assets, which is less than the low end of just the after-death probate costs.
You may be tempted to do your funding on your own. 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 your goals and objectives of your estate plan with you.
This free advice from persons who are not estate planners 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. It will cost you more time, money and effort if instead you follow the advice from: bankers, financial advisors, insurance agents, register of deeds or anyone else.” If this free advice is contrary to the instructions from your estate planner, follow your estate planner’s instructions and ignore the free advice.
In my thirty two years of preparing trust-based estate plans for new clients with existing trusts prepared by other estate planners, I still have not found a single trust that was fully-funded, nor a client who has been able to completely and correctly fund their trust on their own. I used to let my clients fund their own trusts 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 a single one of my clients had completely funded their trust. Trust funding is detailed and tedious and oftentimes, life gets in the way. That is why in our office in 1999, we started doing fully-funded trust-based estate plans.
You should choose an estate planner who will make sure your trust is fully-funded. It may cost more initially, however there will be substantial savings after your death. Your assets will eventually need to be transferred to your beneficiaries. You can do the bulk of the work now by putting your stuff in your trust while you are alive and well, or you can let your beneficiaries do it after you are gone through the probate court process at a substantially higher cost. It’s like the old Fram oil filter commercial, “Pay me now, or pay me a lot more later.”
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 overall cost to you and those you love.
By Matthew M. Wallace, CPA, JD
Published edited February 18, 2018 in The Times Herald newspaper Port Huron, Michigan as: Making your trust work by funding it