Funding Your Trust

Dean hanewinckel

The revocable Trust is a powerful and efficient estate planning tool to avoid probate and reduce estate taxes. However, it is important to understand that the Trust is only effective for those assets that have been transferred to the Trust. You can pay a fortune for a terrific Trust agreement, but if your assets are not titled in the name of the Trust, they will still have to pass through probate to get to your heirs.

I frequently meet with new clients who have had their trust prepared elsewhere and want me to review their estate plan.  The come into my office with a big, leather bound binder.  The office lights reflect off of the gold lettering that majestically says:  "Estate Plan."  Before I even open the binder, I ask my new clients, "Have you funded the trust?"  They look at me like I'm from Mars.  They have no idea what I'm talking about.  They also have no idea that the plan they paid thousands of dollars for will cause all of their assets to go through probate.  That is, until we properly fund the trust.

The first step in funding the Trust is determining the correct name in which to title your assets. The property will not be owned by the Trust itself but by the Trustee, subject to the terms of the Trust.  The proper way to designate ownership is:

John Smith, Trustee of the John Smith Trust dated July 4, 2012.
Any assets transferred to the Trust should be titled in this name. Deeds must be prepared to transfer real estate from the Grantor to the Trustee. Because of Florida's unique laws, transferring homestead to your Trust improperly may create serious title problems. You should consult with a competent estate planning attorney before doing so. Bank accounts should be titled in the name of the Trustee, as should stocks, bonds and mutual funds. Individual retirement accounts, 401(k) plans, certain annuity contracts and other tax deferred investments will usually remain in the name of the Grantor. Transferring these investments into the Trust may have adverse tax consequences.

Regarding life insurance, you should consider having your spouse as primary beneficiary of the insurance policy on your life and vice versa, and that the Trustee be named as a contingent beneficiary using the following designation: Successor Trustee of the John Smith Trust dated July 4, 2012. You should contact your insurance agent and request him or her to provide you with the necessary forms to change ownership of the policies and to make the change of beneficiary as indicated.

Before naming the Trustee as beneficiary of any tax deferred investment, you should consult with your tax advisor. There may be tax advantages to naming individuals as beneficiaries as opposed to a trust.

Remember, if you do not transfer your assets to your Trust, it will do you no good in your goal to avoid probate. Any assets owned individually by you at the time of your death that do not have transfer on death or beneficiary designations will have to go through probate to get to your Trust and eventually to your heirs.