A revocable living trust can be a valuable estate planning tool. It can help ensure that your finances remain well managed if you become incapacitated, meaning you are unable to manage your affairs while alive. It can also provide future financial security for your loved ones after your passing.
However, signing the trust agreement does not complete the estate planning process. For your trust to work properly, you must also pay attention to trust funding.
What Is Trust Funding?
Trust funding is the process of transferring ownership of your accounts and property to your trust during your lifetime.
For certain accounts or property, funding may instead involve naming the trust as a beneficiary. This allows the trust to receive the asset after your death rather than taking ownership during your lifetime.
A trust generally controls only the assets transferred to it or directed to it through a valid beneficiary designation. Creating the trust document without properly funding the trust may leave important assets outside your plan.
Why Is Trust Funding Important?
A properly funded trust can help your loved ones avoid probate. It can also make the transition from you as the current trustee to your appointed successor trustee much smoother.
Your successor trustee is the person you selected to manage the trust if you become incapacitated or after you pass away.
Proper funding can make trust administration easier in several important ways.
Your Trustee Can Access the Trust Property
If you properly fund your trust, your successor trustee should have less difficulty stepping in to manage the trust’s accounts and property when you are unable to do so.
This can be especially important if you become incapacitated and immediate action must be taken regarding your finances.
Your successor trustee may need to provide a bank, financial institution, or another third party with documentation showing their authority to act on behalf of the trust. This documentation can generally be prepared without court involvement.
Your Records Help the Trustee Create an Inventory
One of the first tasks your successor trustee may need to complete after your death is preparing an inventory of the trust’s accounts and property.
During the funding process, you should collect documents confirming how each asset is owned and who is named as its beneficiary. If you review these documents periodically and keep them up to date, they can provide your trustee with a valuable preliminary inventory.
Accurate records can save the successor trustee considerable time and frustration during the beginning stages of trust administration.
Funding Helps Ensure Your Plan Is Carried Out
The primary reason you created a trust was likely to control what happens to your accounts and property if you become incapacitated and after you die.
However, the instructions in your trust apply only to property owned by the trust or directed to the trust through a beneficiary designation.
If an account or piece of property is not connected to the trust, the instructions in the trust agreement may not control what happens to it.
How Does a Funded Trust Help Avoid Probate?
Assets properly held in a revocable or irrevocable trust generally pass according to the trust agreement without going through probate. The Maryland Courts’ guidance on probate confirms that assets held in a trust ordinarily pass to the trust beneficiaries outside probate.
An asset left outside your trust may have to go through probate if it:
- Is owned in your name alone
- Is not jointly owned with survivorship rights
- Does not have a valid beneficiary designation
- Is not otherwise transferred outside probate
The Maryland Register of Wills explains that probate is the legal process of collecting a deceased person’s assets, addressing debts, and distributing the remaining property to the people entitled to inherit it.
What Happens to Property Left Outside the Trust?
If an asset is left outside your trust, it may eventually be transferred to the trust through your pour-over will.
A pour-over will should generally be prepared as part of a trust-based estate plan. It directs property remaining in your probate estate to the trustee of your trust.
The pour-over will does not usually contain all the detailed inheritance instructions found in the trust. Instead, the trust explains who will receive the property and when and how the inheritance will be distributed.
Although the trust may eventually control the forgotten asset, your loved ones may still have to complete the probate process before the property reaches the trust. This can add time, expense, and administrative work.
The Maryland Register of Wills explains that a will governs property included in a person’s probate estate, including assets owned in the deceased person’s name alone.
What If There Is No Pour-Over Will?
If you do not have a will, or your loved ones cannot locate it, property outside the trust may be distributed according to state intestacy law.
The law generally prioritizes certain family members, such as a surviving spouse, children, grandchildren, parents, or siblings. The exact distribution depends on the applicable state law and which relatives survive you.
Relying on state law may produce an outcome you did not intend. Your property could pass to someone you wanted to disinherit or to someone you intended to receive only a small share.
When Will Your Trust Not Control an Asset?
Your trust may not control an account or piece of property if someone other than the trust is named as the beneficiary.
In that situation, the asset generally passes to the person or organization listed on the beneficiary designation, regardless of what the trust agreement says.
The same principle may apply to jointly owned property with survivorship rights. When one owner dies, the deceased owner’s interest may pass automatically to the surviving owner rather than through the trust or will.
However, the result depends on the form of joint ownership. For example, the Maryland Register of Wills explains that property owned as tenants in common does not automatically pass to the surviving owner. Instead, the deceased owner’s share is subject to the owner’s will and probate administration. More information is available in the Register’s guidance about wills and probate assets.
It is important to know what your current beneficiary designations and ownership documents say. They should work together with the instructions in your trust and your overall estate planning goals.
Which Assets Should You Review?
Trust funding does not necessarily mean that every asset should be retitled in the trust’s name. The correct approach depends on the asset, tax considerations, account rules, and your estate planning goals.
As part of the funding process, you may need to review:
- Real estate
- Bank accounts
- Nonretirement investment accounts
- Business interests
- Life insurance policies
- Retirement accounts
- Annuities
- Vehicles
- Valuable personal property
- Payable-on-death or transfer-on-death designations
- Jointly owned property
Some assets may be transferred directly to the trust. For others, the trust may be named as a beneficiary. Certain assets may be better left outside the trust.
An estate planning attorney can help you determine the appropriate treatment for each account or piece of property.
Keep Your Trust Funding Current
Trust funding is not necessarily a one-time task.
You may acquire new property, open new accounts, refinance real estate, change financial institutions, or update beneficiary designations. Each of these events can affect whether your assets remain coordinated with your trust.
Review your trust funding after major financial or family changes. It is also helpful to conduct periodic reviews even when no significant change has occurred.
Keep copies of deeds, account statements, beneficiary confirmations, assignments, and other funding records with your estate planning documents. These records can make your successor trustee’s job significantly easier.
Working Together Now for Future Success
You obviously care deeply for your loved ones. You would not have taken the time to create an estate plan otherwise.
The last step is making sure your trust is properly funded.
At McDonald Law Firm, we can help you review your accounts and property, determine how each asset should be handled, and complete the trust funding process. Let’s work together to ensure that your planning sets you and your loved ones up for a successful future.
Contact Andre O. McDonald, a knowledgeable Howard County, Montgomery County, and District of Columbia estate planning, special needs planning, and Medicaid planning attorney, to schedule a consultation:
- Howard County: 443-741-1088
- Montgomery County: 301-941-7809
- District of Columbia: 202-640-2133
You may also request a consultation online.
DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL, INSURANCE, OR TAX ADVICE.
