Establishing a trust but failing to fund it is like opening a bank account without depositing a single penny. Your trust may be worth nothing more than the paper it’s printed on until it’s funded. Funding is simply the process of transferring assets into the trust. Those assets aren’t protected by the terms of the trust until this happens, so funding is an essential part of creating trusts of many kinds – both revocable and irrevocable.
Why You Have to Fund Your Trust
Creating a trust is essentially a two-step process. First, the trust agreement is drafted. You might work with an attorney to determine what type of trust will best serve your needs, what terms and protections the trust should have, and what assets you’ll hold in the trust. As the settlor or grantor (the person who creates the trust), you’ll then sign the completed trust agreement.
But if you sign the trust agreement and then do nothing else, the trust won’t serve its purpose. The second part of establishing your trust is funding it. The terms of the trust only apply to assets that are held within it. Grantors don’t benefit from any of the protections a trust affords until it’s funded, and trustees can’t control or access assets that haven’t been properly transferred to the trust.
Say a grantor creates a trust with the intention of using it to transfer his house and other property to his children when he dies, without them having to go through probate. If he fails to complete those transfers, the property will not become part of the trust. His children will still have to go through probate when he dies, opening themselves up to months of legal proceedings and potentially costing them thousands of dollars. Furthermore, the probate process opens up a decedent’s estate to claims from creditors. Assets held in trust may be inaccessible to creditors.
How Trust Funding Works
The funding process might seem daunting to some grantors, but it’s often more time-consuming than it is truly difficult. (Keep in mind that the attorneys who help you draft your trust will generally also help you determine how to approach its funding!)
How funding works depends on what assets the grantor wants to transfer. With assets that have a legal title or deed – such as real estate and certain types of financial accounts – the grantor changes the owner’s name from his name to the name of the trust. Transferring financial accounts may require the grantor to provide the financial institution with proof that the trust exists. Because it’s so common to use trusts in this way, financial institutions generally have clear processes that clients funding trusts can follow. Untitled assets, like furniture and personal items, may be transferred to the trust by creating assignment forms.
When you’re working on funding your trust, your attorney may suggest creating a pour-over will. This document adds another layer of protection to your estate plan. It’s a type of will often used in conjunction with living trusts, and says that any assets you didn’t transfer to the trust during your lifetime are automatically transferred to the trust upon your death. Those assets would still have to go through probate, but would become the property of the trust after that and would be distributed in keeping with the terms of the trust.
A grantor’s pour-over will may never be necessary, but it’s a useful tool in certain cases. If a grantor buys a boat but dies before transferring it to her trust, a pour-over will ensures that the boat becomes part of her trust rather than part of her estate. The boat would have to go through probate and would then be transferred to the beneficiaries named in her trust. Without the will, the boat’s new owner could be determined by the state’s intestate succession statute. That person might be an estranged relative, rather than the person the deceased would have preferred inherit the boat.
Like with so many parts of estate planning, funding your trust can be complicated. Determining which assets you can and should move to a trust isn’t something most people can do on their own. The team at Ladimer Law is here to help with all parts of the trust creation and funding process. Contact us to discuss your unique case.
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Ladimer Law specializes in estate planning. We protect our clients, their heirs, and their assets by listening closely, knowing the law, and executing estate plans that fit and evolve.