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An unfunded trust is an overlooked detail that can derail your estate plan

by Legacy Plan
August 28, 2023

When it comes to estate planning, even the slightest of details can matter immensely. One seemingly minor oversight can lead to an avalanche of unintended consequences that can undermine the very estate planning goals you hope to achieve. Among the pitfalls of estate planning, one stands out for its simplicity and severity: the failure to fund a revocable living trust.

At its core, an unfunded trust is a trust that has not been properly funded with the assets it was intended to hold. This often results in the assets falling outside the protection of the trust, leading to the failure of the estate plan.

How does a revocable living trust work?

A revocable living trust is legal arrangement between you and your self-appointed successor trustee to manage and distribute assets titled in the trust's name to beneficiaries named in the trust document. As the trust’s creator, known as the grantor or settlor, you control trust assets during your lifetime. Your successor trustee acts on your behalf to manage trust assets according to your instructions upon your incapacity or death. Involvement with the probate court – and the expense, delays and lack of control and privacy that goes along with it – is not required and a major advantage over a last will and testament.

What does funding a trust mean?

person handing a wooden block house to another person at a table with money and a trust

The process of titling assets into the name of the trust is called “funding” the trust. Assets not properly funded into the trust cannot be controlled by provisions of the trust, which include the grantor’s specific instructions. However, a properly drafted and funded trust avoids probate and prevents public disclosure of your assets and beneficiaries.

When you fund a trust, you are essentially taking assets that you own personally and moving them into the trust's ownership. The exact manner in which this is done will depend on the type of asset. For example, to transfer real estate to a trust, you'd generally need to execute a new deed transferring the property from your personal name to the trustee of the trust. For bank accounts, you would change the name on the account to that of the trust or open a new account in the name of the trust. For stocks, bonds or mutual funds, you'd typically provide instructions to your brokerage firm to retitle the assets in the name of the trust. Items such as artwork, jewelry or other valuables can be transferred into a trust with a declaration of intent document. Ownership interests in businesses also can be transferred to a trust, but this may involve more complex mechanisms like amending the operating agreement or issuing new stock certificates.

As mentioned, an unfunded or improperly funded trust will fail to achieve its intended purposes, such as avoiding probate or ensuring the proper management of assets. Properly funding a trust often involves both legal and financial expertise, so it's wise to consult with an attorney or financial professional when doing so.

Why is trust funding important?

A trust that is not funded has no assets and, as an empty legal vessel, is worth little more than its paper and ink. A comprehensive estate plan often includes a trust to manage, protect and distribute assets according to the grantor's wishes. Once the trust is established, the next crucial step is to transfer assets into the trust. When this step is overlooked or improperly executed, the trust is ineffective. While an unfunded trust has little value, a properly funded trust can provide numerous benefits.

Why would someone use a revocable living trust?

wooden blocks stacked in a pyramid shape with the image of a shield on the top block and assets on the other blocks

Trusts are versatile tools in estate planning, and people utilize them for a variety of reasons. One of the primary reasons individuals establish trusts is to avoid probate. But if the trust is unfunded, the assets remain under the deceased's name and become part of their probate estate, negating one of the main reasons for creating the trust in the first place. Family members and beneficiaries prefer to avoid the probate process because it can be time-consuming, frustrating, expensive and a matter of public record. By transferring assets into a trust, those assets can pass directly to the beneficiaries upon the grantor's death without going through probate, and the terms of a trust and its assets can remain private.

Another key reason trusts are a valuable estate planning tool is that they enable the trustee to have control over asset distribution. Trusts allow the grantor to specify in great detail how, when and to whom assets should be distributed. This can be especially useful for beneficiaries who might not be financially responsible, have special needs and income restrictions to qualify for government benefits or would benefit from having distributions staggered over time.

A revocable living trust also can be used to protect assets from the beneficiaries' creditors after the grantor's death. One of the most common ways to protect trust assets from the creditors of beneficiaries is through a spendthrift clause. This provision prevents beneficiaries from assigning, pledging or transferring their interest in the trust. Additionally, it bars creditors from attaching or reaching the trust's assets until they are actually distributed to the beneficiary.

The trust also can be designed to give the trustee discretion over distributions to beneficiaries. If the trustee has the discretion to decide when, how and whether to make distributions to a beneficiary, it's harder for that beneficiary's creditors to access trust assets. This is because the beneficiary doesn't have a fixed right to any specific distribution from the trust.

Instead of distributing assets outright to beneficiaries upon the grantor's death, the trust also can be structured to hold assets in separate continuing trusts for each beneficiary. These can last for the beneficiary's lifetime or a specified period, and distributions can be made at the discretion of the trustee. This can provide prolonged protection against creditors, as well as other potential threats like divorcing spouses.

However, it's important to note that while a revocable living trust can be structured to offer these protections for beneficiaries, it does not provide asset protection for the grantor during their lifetime. Any asset in a revocable trust is still considered part of the grantor's taxable estate and can be reached by the grantor's creditors.

If the beneficiaries are minors or otherwise incapable of managing their financial affairs, a trust can ensure that the assets are managed properly on their behalf by a trusted individual or institution. Or, individuals might use trusts to ensure that, after their death, their assets will benefit their children or other intended heirs rather than a spouse's potential future spouse from a remarriage.

Charitable giving is another area where trusts can be helpful. Charitable trusts can be established to provide benefits to a particular charity, offering both estate tax benefits and supporting philanthropic goals.

Business ownership succession is another reason to use a trust. Trusts can be instrumental in passing control of a family business to the next generation in a tax-efficient manner and in accordance with the grantor's wishes.

Meanwhile, for individuals with properties in multiple states, a trust can help avoid the necessity of probate proceedings in each of those states.

What can happen if a trust is not properly funded?

There are plenty of examples of the unintended consequences of an unfunded trust. One well-publicized case is that of the late pop singer Michael Jackson. Although he had established a trust, at the time of his death many of his significant assets had not been transferred into it. This oversight led to a complicated probate process, public scrutiny, family disputes, long delays, negative headlines and hefty legal fees.

Or, consider the example of the business owner’s blunder. A businessman established a trust to ensure the seamless transition of his business interests upon his death. Unfortunately, he failed to transfer the business shares into the trust. Upon his demise, the company shares went through probate, leading to delays, added expenses and reduced control over business decisions during the transition.

Then, there’s the well-intentioned parent. For example, a mother created a trust to ensure her disabled son would be cared for without jeopardizing his eligibility for government benefits. After her passing, it was discovered that the trust was unfunded. The direct inheritance caused the son to lose his benefits until the assets were spent down, the very outcome the trust aimed to prevent.

In the case of individuals who become incapacitated, having their assets in a trust can provide a clear management structure. But assets not funded into the trust could lead to an estate planning failure by requiring the court-involved appointment of a conservator or guardian – who often is a complete stranger – to control the assets.


The implications of an unfunded trust can be far-reaching and devastating. It underscores the importance of not only setting up a trust but ensuring that the trust is properly funded. Consulting with an experienced attorney who specializes in estate planning is crucial to ensure that one's wishes are executed and that beneficiaries are protected. Remember, a trust without its assets is akin to a car without its engine – it looks the part but fails to function as intended.

How do I create an estate plan?

There are numerous options and scenarios to consider when developing an estate plan that protects your legacy and achieves your objectives, and important decisions should be made with the advice of qualified lawyers and financial experts. Membership with Legacy Assurance Plan provides members with valuable resources and guidance to develop comprehensive estate plans that take life's contingencies into consideration and leave a positive impact for generations to come. Legacy Assurance Plan members also receive peace of mind that a team of trusted, experienced professionals will assist them in developing legal, financial and tax strategies that will meet their needs today and for years to come through periodic reviews.

This article is published by Legacy Assurance Plan and is intended for general informational purposes only. Some information may not apply to your situation. It does not, nor is it intended, to constitute legal advice. You should consult with an attorney regarding any specific questions about probate, living probate or other estate planning matters. Legacy Assurance Plan is an estate planning services company and is not a lawyer or law firm and is not engaged in the practice of law. For more information about this and other estate planning matters visit our website at

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