Don't Forget: You Must Fund Your Trust!

Trust-based estate planning has many benefits for individuals and families to protect your wealth and assets from taxes and to make sure your loved ones benefit from your estate in the way you intend. But, trust-based planning requires your active participation in the planning process as well as in funding the trusts we create.

Without transferring assets into your trust -- funding it --  the trust document is just a useless set of papers.  A trust, at its core, is a contract between you (the grantor) and the trustee to hold and dispose of your assets in a certain way. If you never transfer assets to the trust, the trustee has no assets to command.

What are the consequences of not funding a trust properly? 

• Your family may have to spend the time and money to go through probate – which is what you wanted to avoid when you created the trust. Remember, a contested probate can lead to years of litigation and lengthy family fights. 
• You might not qualify for public benefits. 
• There may be adverse tax implications. 

Funding your trust is a very important step in the planning process. While we can guide you in the process, it’s your responsibility to take action.

Let’s take a look at how to transfer certain assets into a trust. 

Real property

You need to title the deed(s) to real property, to something similar to this: “John Smith, as trustee of the Jones Family Preservation Trust dated January 27, 2019.” The title is now held by the trust   -- not you. The deed should be properly recorded and proof of this recording should be kept with your trust documents.

Mortgage companies cannot object to the transfer of your residence into your trust. Federal law prohibits foreclosure if the house is in your trust. It is rare that a mortgage company objects, as the law is well known and called the St. Germain Act.

Your homeowner’s insurance should be told to add your trust as “an additional insured” just like your mortgage company is an additional insured. This prevents the insurance company from denying coverage if there is a fire or an accident.

When you place rental property into the trust, you should inform your renters that their future payments need to be made to the trustee, not to you.  Review the rental agreement to ensure this is assignment of the lease is permitted. 

Certificate of Deposit (CD)

To transfer a CD into a trust, you would retitle it, using the same format as above: “John Smith, as trustee of the Jones Family Preservation Trust dated January 27, 2019.”

Some banks may view the re-titling of the CD as a change in ownership and may require that a new CD be issued.  This could result in the loss of projected interest on the financial instrument.  As your attorney, we can help you analyze whether losing this interest outweighs the positive effects of retitling the CD.

401k/IRA Accounts

We don’t transfer 401k or IRA accounts into trusts for a number of reasons, chiefly because the IRS seeks to tax any account that has a change of ownership. The IRS considers the re-titling of an IRA a taxable event even when the trust uses your social security number, so do not do that. You can make your trust the beneficiary of your 401k or IRA. We frequently create special retirement trusts to handle qualified tax accounts with care.

Our staff are well-educated to help you fund your trust properly. Give us a call if you have questions, but don’t delay funding your trust.