A trust is only as valuable to you as what you are funding into it. Trusts in estate planning exist for the explicit purpose of providing an alternative to wills, and the probate process attached to them. If one disregards probate, then a trust confers minor benefits over a will, which is often deemed simpler to set up and easier to manage.
There are, of course, other reasons to set up a trust than simply to avoid probate but it is by far the biggest reason. However, creating a trust document is only half of the trust creation process. You must formally change how you own certain property, especially real estate.
Thankfully, the process is not very complicated. While it may be tedious depending on how much property you own, and where, it would ultimately defeat the purpose to set up a trust and fail to incorporate your largest and most valuable assets: lands and homes.
Why This Matters
Arguably the most important feature of a trust in a very large estate is to help you facilitate the inheritance of your properties and real estate to your kin without excessive costs and mountains of probate-related paperwork. Probate can be a swift and painless process in many cases, especially with smaller estates, but it can also be the source of much stress and strife for families still struggling to cope with the loss of their loved one.
Therefore, a trust can save you plenty of headaches and can save your family a lot of unnecessary pain, especially if you own a lot of property. There are a few minor things to be wary of, and there are a few general precautions. For example, it is important to establish what state you truly live in, especially if you possess property all over the country.
Your primary home or legal domicile – the home you typically spend the most time in, or the home that is legally your primary residence – determines what state you legally reside in, including what income taxes you must pay, and what estate taxes and probate rules your family may face upon death.
Even if you spend a lot of time in Florida or Washington, if your domicile is in California, your probate process will take place in a California court – at least, in part. Your property in Florida, or Washington, or any other state, may in fact call for an ancillary probate. This is a secondary probate process specifically for out-of-state property, including but not limited to homes, cars, and boats.
Funding Your Trust
Crafting a trust document gives you the framework for a living trust, but you have fund your trust with the contents of your estate. Some items do not need to be funded into a trust, including furniture, groceries, and clothes. Unless these are especially valuable (collectible or special antique furniture and clothing), they typically go to the next of kin or are included in the home when it is transferred to the trust’s beneficiaries.
Other forms of personal property that do not require title documents to own, including jewelry and artwork, can be funded into a trust automatically through a General Assignment of Property clause in the trust. Typically, this allows everything you own under the value of $20,000 to automatically be funded into the living trust.
Anything that requires a deed, title document, or is worth more than $20,00 will usually require a formal change in ownership, witnessed by several individuals and officially notarized. This involves amending ownership documents or creating new ones, retitling property to belong to the John Doe Living Trust, established July X, 2018, for example, rather than belonging to John Doe.
Properties that involve beneficiaries – such as transfer-upon-death properties and accounts, including retirement accounts – can be funded into a trust much like funding other property. However, this leaves the property in your ownership and under your control until you pass away, rather than transferring ownership to the trust.
Another way to do this is to create a testamentary trust, essentially using your will to create a trust for all your property at the moment of your passing, rather than while you are still alive. However, this does not allow you to avoid probate. Rather, it gives you more control over how your assets are distributed after you pass away.
If you own real estate in several different states, or own several pieces of real estate, do not forget to fund them into your trust. You can own land and property in different states but fund it into one living trust. Be sure to fund it into a living trust if you aim to avoid probate and ancillary probate.
Avoiding Common Pitfalls
Creating a living trust is not without its own set of challenges and overcoming them requires experience and patience. It takes both time and finances to set up a comprehensive estate plan, but the result is undoubtedly worth it. Here are some common pitfalls you should avoid:
- Getting your priorities wrong: It is best to fund the most valuable property into your trust first, then continue down your list in a descending order.
- Choosing a DIY trust document: Although the internet may make you think drafting your own trust document is a simple process, there are countless state-specific nuances and details that are relevant only under specific circumstances. It is generally unsafe to try and draft your own trust unless you have assistance from a professional estate planner. Even the simplest clerical error can cost thousands of dollars to mend in the future.
- Funding the wrong things into a trust: There are properties that should not be funded into a trust, due to inefficiency or higher cost than benefit, including tax-deferred retirement accounts, stock options, interest, property already assigned to beneficiaries outside of probate, and UTMA/UGMA accounts.
- Making use of a trust for a small estate: Unless you specifically want to take advantage of the greater control a living trust offers, it is usually unnecessary to fund a small estate into a trust. You can opt to expedite the probate process for smaller estates. A small estate in California is any estate with a total monetary value below $150,000.
Be sure to closely evaluate your estate with an estate planning attorney before making any serious decisions regarding inheritance. It is best to go over the details and circumstances with a local legal professional, rather than simply going off general information online.
Frequently Update Your Trust
Estate plans are not meant to be drafted once, then ticked off as done. While it may be more convenient to create an estate plan and put that all behind you, think of an estate plan as an evolving and adapting set of documents and legal instruments, meant to change alongside your circumstances and realities. Marriages and lives begin and end, changing familial relationships and altering priorities.
If you have not touched your estate plan in years, you may come to realize that there are many things you may want to amend, from changing beneficiaries to adapting to new estate tax laws. Do not catch your family by surprise with an old and outdated estate plan – be sure to regularly update your estate plan, whenever a major event occurs in the family or in your life.