Having a Living Trust has a number of advantages. A person can set up the Trust so that their assets can by-pass probate. This saves on time and expense in the distribution of the person’s assets. In addition, by not going through probate, the distribution is private and not subjected to public disclosure.
To accomplish this outcome, first the person must set up a Living Trust. This is best done through an experienced estate planning attorney. Once the Trust is signed, the next step is to get the person’s assets into the Trust. This process is called “funding” the Trust. This requires taking action–it involves taking steps and does not happen just by setting up the Trust.
So how does a person fund their Trust? There are two main ways to accomplish the funding. The first involves transferring the title of an asset to the name of the Trust. In effect, it is the “renaming” of the asset into the name of the Trust. For example, if John Doe owns a home, a deed is signed by him and recorded transferring the title from John Doe, individually, to John Doe, Trustee of the John Doe Living Trust. The same can be done with financial accounts including checking, savings, money market, and stock accounts. In that instance, if John Doe has a savings account in his name, he could transfer the account to John Doe, Trustee of the John Doe Living Trust.
Another way to fund the Trust is by naming the Trust as beneficiary or pay-on-death (“POD”) designee on an account or insurance policy. In that instance, the account or policy continues to be owned in the person’s individual name but at death the account or policy pays into the Trust. So by example, if Sally Roe owns a life insurance policy in her name, the policy would continue being owned in her name but the beneficiary could be listed as the “Sally Roe Living Trust.” Upon Sally’s death, the Trustee would submit a death claim form and the life insurance benefits would be paid into the Trust and distributed according to the Trust terms.
Funding a Trust is a crucial part of setting up a Trust. If a person signs a Trust but does not fund it, then the person’s assets will likely have to go through probate. This will defeat one of the most important aspects of a Trust. The assets may ultimately end up in the Trust but they will do so only after the time, expense, and inconvenience of probate.
A real life example may demonstrate the importance of funding the Trust. We once had a client who came to us about their deceased mother’s Trust. The mother had established a Trust many years before through an attorney (not our firm!). The Trust was well-drafted and appeared to accomplish the mother’s wishes—with one big exception. The mother had never transferred anything into the Trust. In other words, all of the mother’s assets were still in her individual name. The mother had mistakenly thought that setting up the Trust automatically placed assets into the Trust. It does not! The fact of the matter is that she should have either renamed her assets in the name of the Trust or, where available, designated the Trust as beneficiary. Since she had not done that, a full probate was required. A year and a half and $12,000 later, the assets ended up in the Trust—via probate!
When setting up a Trust for a client, a good estate attorney will not only draft the Trust. The attorney will also provide instruction and assistance in getting the Trust funded. If they do not, then they have failed their client. However, after being instructed on the funding, the client must take steps to complete the process.
