You finally have signed your trust. But hopefully, your estate plan includes more documents and instructions than your trust. In addition to your trust, you should have, at a minimum, your financial and health care powers of attorney and your pour-over will.
Your financial and health care powers of attorney will allow your appointed agents to make financial, health care 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 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 sitting in your driveway. 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 is your assets.
When it comes to trusts, the titling of assets matter. How assets are titled and/or beneficiary designated determine what instructions will be used to use and distribute those assets during your lifetime and after your death. In order to gain all the benefits of your trust, your assets must completely and correctly name your trust and individuals as the owners, beneficiaries and insured parties. This 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 designate your trust the primary or contingent beneficiary and/or name your trust as 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 and the terms of the account agreement.
With cash accounts, CDs, stocks, bonds, mutual funds and brokerage accounts, we typically directly name your trust as the owner and remove any payable- or transfer-on-death beneficiary designations on the accounts.
With retirement plans, IRA’s, and annuities, we generally name your trust as the primary beneficiary, with your surviving spouse, children or other beneficiaries as contingent beneficiaries. Who is primary or contingent beneficiary depends on the terms and conditions of your estate plan and the account contract.
We usually change the beneficiaries on your life insurance policies to your trust as the primary beneficiaries and your surviving spouse, children or other beneficiaries as contingent beneficiaries. If your life insurance policy is individually owned and not a group policy, we typically also change the ownership of the policy to your trust.
We will generally 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, before we record the deed transferring the real estate into your trust, we usually notify the mortgage company of the transfer in the case of your home, or we obtain a waiver of the due-on- transfer clause that is in the mortgage for non-homestead property.
Sometimes your motor and recreational vehicles and watercraft are re-titled and insured in the name of the primary driver’s trust, and sometimes you keep it titled in the primary driver’s sole name. It all depends upon the value of the vehicles or watercraft, the number, location and relationship of your beneficiaries, and if you are married.
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 often have clients inform us that they have been told that they do not need an attorney to fund their trusts. Their financial advisor or insurance agent says the they can do it for free or the tax preparer says they can do it cheaper than the attorney or the register of deeds or banker tells them how to put their assets into their trust. And you get what you pay for. I have never ever seen a trust completely and correctly funded by a financial advisor, insurance agent nor a tax preparer, nor by following the advice of the register of deeds or banker.
Many years ago, 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 all their assets into their trust. However, some did get more done than others. Because of this, in 1999, 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. This assures that our clients’ trusts get fully-funded.
There are even some estate planners out there who will prepare your trust and intentionally not fund it. They are planning a way to fund their retirement. 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 through your pour-over will.
You have to be very careful when amending your trust. I regularly see trusts of people who have updated their trusts, but instead of the planner keeping the name of their old trusts, they have new trusts. For example, if you had a trust that was originally dated October 8, 2012 and you decide to re-do your trust on September 22, 2017, your new trust should be an amendment and restatement of your original October 8, 2012 trust.
If you name your new trust the September 22, 2017 trust, 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, real estate 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 provisions of 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 October 8, 2012 will always be properly funded no matter how many times you amend and restate your trust. When you amend and restate your trust in ten years, it would still be called your trust dated October 8, 2012.
Unfortunately, most estate planners do not embrace this fully-funded trust philosophy, where the planner takes responsibility for following up on the funding of your trust. Oftentimes, 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 really not an instruction letter, but 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 32 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. Or they will bypass your will or trust with joint ownership or with a payable- or transfer-on-death beneficiary designation.
If you have a trust, you should do a funding review on at least an annual basis, preferably with your estate planner, 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; all at the lowest predictable overall cost to you and those you love.
By: Matthew M. Wallace, CPA, JD
Published edited September 09, 2018 in The Times Herald newspaper Port Huron, Michigan as: The title of assets matter with trusts