A Living Trust Must be Properly Funded

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Why is trust funding important?

Your trust must be properly funded to be effective. For assets to be controlled by a trust, they must be formally titled in the name of the trust. Assets not properly funded into the trust remain property of an individual person and are subject to probate. A trust that is not properly funded fails to meet key objectives of asset management during the life and after the death of the grantor as well as probate avoidance.

Why plan with a revocable living trust?

There are many reasons people base their estate plan on a revocable living trust. Unlike a will-based plan, a funded trust bypasses the time-consuming, expensive and public process of court-administered probate. Trusts remain private and are effective during and after your life, and you retain full control of the assets that are properly funded, or titled, in the name of your trust. The successor trustee you choose acts as a fiduciary and follows the terms of your trust upon your incapacity or death. Certain assets, however, cannot or should not be funded into a trust.

Why is a revocable living trust beneficial?

More information on Trusts GIF.The benefits of trusts to individuals and families are numerous. Besides maintaining privacy and avoiding probate, trusts are useful in planning and managing assets during incapacity and for minor and special-needs children, blended families and future generations. Trusts are flexible, enabling you to freely buy, sell, add or remove assets. Wills, which require probate administration, do not take effect until death and require witnessed and notarized amendments to reflect any changes in assets during your lifetime. 

Household goods

The contents of your house are personal assets, separate from the actual real estate, and are subject to probate. Your personal effects – household goods, jewelry, furniture, artwork, books, collectibles as well as livestock, some vehicles, firearms and other items – don’t have titles, so the items cannot be individually retitled. A Declaration of Intent / Bill of Sale / Assignment of Household Property (document name varies by state) is used to transfer assets into the name of your trust. Some states, however, do allow for transfer-on-death designations (ToD) for vehicle titles.

Real estate

Real estate is transferred from your individual name to your trust by signing and recording a deed in the county where the property is located. You may also need to refile property tax exemptions, such as a homestead exemption. Also, check with your lender and homeowner’s association regarding their approval of the transfer. The taxes, fees and other costs associated with the transfer vary depending on the state. 

Bank Accounts

You will need to visit your bank and sign new signature cards to retitle your accounts into the trust’s name. Banks also require a notarized copy of your certificate of trust or trust abstract, which is a summary of the trust provisions, for your application. However, not all banks and credit unions allow checking, savings and money market accounts to be titled in the name of your trust. In that situation, you can place a pay-on-death (PoD) designation on accounts to pay the funds into your trust outside of probate. Your successor trustee would then deposit those funds into a new account (potentially at a different bank) in the name of your trust after your passing. 

Business assets

Assets owned by your business (an LLC or corporation) are not transferred into the name of your trust. Transferring assets from a business entity to a trust would cause the assets to lose the liability protection you created the entity to provide. Also, trust ownership can violate a professional business’ licensing requirements.

Business ownership interests

A membership interest in an LLC or stock in a corporation is a probate asset. The transfer process into a trust is different for the two entity types. An LLC membership interest can be funded into your trust by amending the operating agreement to name the trust as the member. In some circumstances, an LLC interest can also be assigned to a trust. For a corporation, the trust needs to be named as the shareholder. The shares in your individual name need to be voided and new shares issued in the name of the trust. The corporation’s stock ledger also needs to be updated to reflect the change in ownership.

Brokerage accounts

Brokerage accounts are usually not retitled into your trust because they contain accounts for both retirement and non-retirement funds. If the account contains only non-retirement account funds, it can be retitled into the name of a trust. Even if not retitled into a trust, your brokerage account can still avoid probate by adding a transfer-on-death (ToD) designation. However, not all assets in a brokerage account, such as gold, can be transferred using a ToD designation. Note, brokers have different rules regarding whether an account can be titled into the name of a trust.

Stocks

Individual stocks held outside of a brokerage account are transferred into the name of your trust by contacting the transfer agent and updating the corporation’s records. Original stock certificates can be exchanged for new certificates issued with the trust named as owner. (Most transfer agents will list stock ownership in electronic form and not issue paper certificates.) Another option is to create a brokerage account in the name of the trust in which your stock certificates are deposited and converted to electronic form.

What can be funded in a trust?

Funding a trustLegacy Plan Logo
Asset Yes No
Household Goods (furniture, clothing, equipment, etc.)   X
Real Estate   X
Bank Accounts   X
Business Assets   X
Business Ownership Interests   X
Brokerage Accounts   X  
Stocks     X
Bonds   X
Vehicles   X
Retirement Accounts     X
Life Insurance     X
Annuities      X
Digital Assets and Social Media Accounts   X

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Bonds

Individual bonds can sometimes by titled into the name of your trust, depending on the issuer. U.S. savings bonds are retitled by submitting a form to the Treasury Department (for paper bonds) or submitting a request at TreasuryDirect.gov (for electronic bonds).

Vehicles

A vehicle that is leased or financed cannot be transferred into the name of your trust. A paid-off vehicle can be transferred into the name of your trust, but this strategy is usually reserved for collectible or other especially valuable vehicles. The simplest way to avoid probate of a vehicle is to place a transfer-on-death designation on the title or use an ownership transfer form at the DMV.  Vehicles that do not have titles, such as farm or construction equipment, are funded along with your other untitled property and household goods via a Declaration of Intent or similar document.

Retirement accounts

Tax-qualified retirement accounts, such as 401(k)s and IRAs, are not funded into trusts. Transferring a retirement account to your trust would be considered a withdrawal of the assets and a taxable event, causing the entire account balance to count as taxable income. Retirement accounts avoid probate when the owner properly completes the account’s beneficiary designation form. In appropriate circumstances, a trust, usually not a revocable living trust, can be named as a retirement account’s beneficiary.

Life insurance

Life insurance is not funded into your trust. Life insurance avoids probate when the account’s beneficiary designation form is properly completed. In limited circumstances, like when beneficiaries are minors, a trust may be named as the beneficiary of a life insurance policy. 

Annuities

Annuities, except in very special circumstances, are also not titled in the name of your trust. Annuities avoid probate when you properly complete the account’s beneficiary designation form. In some situations, a non-retirement annuity’s beneficiary can be a trust. 

Digital assets and social media accounts

Digital assets and social media accounts usually cannot be funded into a trust, since they are not an asset you own. Most digital assets are licenses that allow you to use or access services like iTunes and Amazon’s Kindle. At your passing, the license terminates, so nothing will need to be probated. The terms of use published by the service provider will determine what happens with an account or service at your death.