A living trust is often cited as a low-risk way to avoid lengthy probate or certain taxes. It can be a straightforward way to divide assets or designate beneficiaries. Some kinds of trusts can be set up to automatically transfer assets to a spouse, others can be modified or amended without difficulty.
But if a trust is not set up properly, it might create problems for your intended beneficiaries. If you decide to use a trust as your primary form of estate planning, it is important to talk to a legal professional about how you are going to fund it.
What’s a Living Trust; Do You Have to Fund It Right Away?
A living trust is a legal entity which is in effect during the lifetime of the grantor. It is designed to pre-designate assets to beneficiaries chosen by the person who has made the trust. Living trusts help the grantor to arrange for financial stability during incapacitation or disability. Since the person who creates the trust is almost always the manager or controller of it (also called the trustee), little tends to change after the creation of the trust. The trust ceases to exist when the grantor passes away and the contents of the trust are then distributed as intended – either to a spouse, who then takes over the trust, or to other beneficiaries.
Where does the money for this trust come from? It’s funded by the assets of the grantor. The person who creates the trust can also transfer real estate holdings, stocks, retirement accounts, other investments, and/or any personal assets to the ownership of the trust (called “funding the trust”). Grantors are not legally required to fund the living trust completely when it is first drawn up and signed. However, having a completely unfunded living trust can defeat the purpose of setting it up in the first place.
What Happens to Unfunded Living Trusts
In order for a trust to exist, it must own at least some assets, if only a small savings account. Some grantors (also called trustors) decide to transfer what remains of their assets to the trust on another date. In order for this to take place, if the grantor is incapacitated, a durable power of attorney becomes useful to take care of this. Durable power of attorney is a specific form of power of attorney. It allows the person acting on behalf of the principal to make decisions, even after the principal becomes incapacitated. Designating durable power of attorney is a way to avoid the long-lasting procedure of appointing a conservator.
While the agent can fund the trust while the principal is still alive, that ability vanishes once the principal passes away. If the principal dies unexpectedly, or if the agent does not have time to transfer all assets to the trust, the assets of the estate will likely go to probate. The trust fund cannot distribute what it does not own.
Assets You Should Transfer
If you have created a trust and have left it unfunded, strongly consider transferring the bulk of your assets to the trust.This is usually a multi-pronged process which demands different specific actions depending on the type of asset. It may involve changing names or titles. In general, the trust has the same Social Security number as the trustor.
Transferring items to a living trust, even in this digital age, often consists of a great deal of errand running. The trustor must provide proof of identity and usually sign documents in the presence of witnesses. Sometimes a legal professional can take care of this, but other transfers must be done by the grantor himself.
Bank Accounts, Real Estate & Other Financial Assets
If the grantor has appointed a trustee and will not act as the trustee himself, both must visit a bank branch in person to retitle the bank account in the name of the trust or to name the trust as a beneficiary of the account. It’s important to remember that in this event, the contents will still belong to the trust, not the trustee. If the trustor will also be acting as trustee, he or she may do this alone. Most banks need a copy of the trust agreement and ask all involved parties to provide government ID before creating a new account.
When transferring real estate, either a real estate attorney or the attorney who helped create the living trust takes care of a new deed transferring the title from the trustor to the trust. The real estate will now be in the name of the trust so that it can be transferred to the beneficiaries later. Real estate title transfers also involve notifying local officials and tax assessors, who will adjust tax records, assessments, and accounts. Additionally, make sure to update any insurance policies on the real estate, such as casualty and homeowners. They will reflect the trust as an insured party.
Next, modify brokerage accounts to reflect their new owner, the trust. Sometimes, just changing the name of the account is sufficient to also move the contents of it to the trust, but not always. Sometimes bonds, stocks, and the like must be reissued, with the name of the grantor stricken and replaced with the name of the living trust.
What shouldn’t be transferred to a living trust? Usually, such assets that pay upon the death of the holder, such as life insurance policies, are not affected by presence in a living trust. In general, the owner of them named beneficiaries when the accounts were first opened. The contents of 401k accounts, IRA’s, and personal items such as jewelry and sentimental objects are usually disposed of according to their individual policies or in the grantor’s will.
That’s a lot to accomplish and could take a long time. This is why living trusts should be funded upon their creation.