The Importance of Funding Your Revocable Living Trust

Creating a revocable living trust is one of the most significant steps you can take in estate planning, but it’s just the beginning. If your trust is not fully funded, meaning your assets haven’t been properly transferred into it, the trust’s benefits—like avoiding probate—will not be realized. In this blog, we'll explore why funding your trust is critical and the steps necessary to ensure your estate plan is as effective as possible.

What Does It Mean to Fund a Revocable Trust?

Funding your trust involves transferring ownership of your assets from your individual name into the name of the trust. Think of the trust as an empty box you need to fill with your assets for it to be useful. Failing to transfer assets, or only transferring some, means that those assets left out will likely pass through probate, defeating one of the key advantages of establishing a trust in the first place.

Here’s what you need to know:

Asset Retitling: For most assets, such as real estate, bank accounts, and investment accounts, you will need to change the title of the asset to reflect ownership by the trustee of your revocable living trust. This may require you to sign new deeds, signature cards, or transfer forms.

Beneficiary Designations: For assets like life insurance policies and retirement accounts, you typically don’t transfer ownership but instead change the beneficiary designation. Be cautious here, as the revocable trust may not always be the best choice for beneficiary designation depending on the type of asset. Consulting an estate planning attorney can help clarify whether the trust or a specific individual should be the beneficiary.

How to Fund Your Trust

Funding your trust can seem like a complicated task, but with careful attention, it’s manageable. Below are steps to ensure your trust is fully funded:

• Real Estate: To transfer real property, a new deed must be prepared, executed, and recorded, listing the trust as the owner. Additionally, it's important to notify your mortgage holder and property insurance provider about the change in ownership to avoid potential issues.

• Bank and Investment Accounts: Visit your bank or financial institution to update the account holder’s name to that of the trust. It’s essential to retain your personal tax identification number, usually your Social Security number, for these accounts.

• Stocks and Bonds: Publicly traded stocks and bonds that are held in a brokerage account can be retitled to the name of your trust. If you hold physical stock certificates, you can either work with a transfer agent to reissue them in the name of the trust or deposit them into a trust-owned brokerage account.

• Retirement Accounts: While retirement accounts like IRAs and 401(k)s should not be retitled in the name of the trust, you do need to update the beneficiary designations. The rules surrounding retirement accounts and trusts are complex, and missteps could lead to unintended tax consequences. Consulting with an attorney or tax advisor is essential when deciding how to handle these accounts.

• Life Insurance Policies: If you want your life insurance proceeds to pass through the trust, you'll need to name the trust as the primary or secondary beneficiary. This step requires careful consideration, particularly if you’re aiming for tax efficiency.

• Personal Property: Items such as jewelry, furniture, and vehicles can also be transferred to the trust. You’ll need to assign personal effects to the trust through a written assignment, which should be kept with your estate planning documents.

Why Is Funding So Important?

The main reason funding is so critical is to avoid probate. Probate can be costly, time-consuming, and expose your estate to public scrutiny. When your assets are properly titled in the name of the trust, they will bypass the probate process upon your death. Additionally, fully funding your trust ensures that the trust’s terms control how your assets are managed and distributed to your beneficiaries.

Another important consideration is that assets held in a trust are not necessarily protected from Medicaid spend-down rules or creditors. For Medicaid eligibility purposes, revocable trust assets are still considered "available" resources. Therefore, while a revocable trust helps with probate avoidance, it does not shield assets from every potential risk.

The Role of the Certification of Trust

A Certification of Trust is a vital document you will likely need when dealing with financial institutions. It confirms the existence of your trust and identifies the trustee, but does not disclose sensitive information, like the names of your beneficiaries or the details of your assets. Be prepared to present this document when retitling assets.

A Word on Taxes

While you’re alive, your trust uses your personal Social Security number, and there’s no need to file a separate tax return for the trust. However, after your death, the trust becomes irrevocable and may split into multiple sub-trusts, each potentially requiring its own tax identification number. At that point, a tax professional can guide your trustee through the necessary steps to ensure compliance with tax laws.

Keep Copies and Stay Organized

Throughout the funding process, it's crucial to keep thorough records. Keep copies of all deeds, bank account statements, and beneficiary confirmations with your trust documents. These records serve as evidence of the trust’s ownership of your assets and will simplify the administration of your estate after you pass away.

Establishing a revocable trust is a smart move, but unless it’s funded, it’s just a piece of paper. Without the proper transfer of assets into the trust, your estate could still end up in probate court. Ensuring that your assets are correctly titled in the name of the trust will guarantee that your estate plan functions as intended. If you have any questions about funding your trust, or if you would like assistance in completing this process, don't hesitate to contact us. Your estate plan is only as effective as the attention and care you put into its funding.

About the Author

Leslie has been practicing law since 2009 and is the host of the estate planning podcast 'Legacy Purse'. She has a long history of representing family members struggling to inherit property and/or wealth from deceased family members through the Probate Courts. Knowing how time-consuming and expensive the probate process is, Leslie takes great pride in helping her clients learn how to plan and protect their families during their lives so they can avoid the probate court process and save their loved ones that additional grief (and expense).