In Florida estate planning, a commonly used instrument is a “Living Trust” (also called a “Revocable Trust” or a “Revocable Living Trust”). In this blog, we will simply call it a “Trust.” There are multiple benefits accomplished by establishing a Trust, including avoiding probate and controlling distribution–particularly to minors or financially irresponsible adult beneficiaries.
In order to be most effective, assets or property must be put into the Trust. This process is often referred to as “funding” the Trust. Clients often ask, how do we fund the Trust, i.e. how do we get our assets and property into the Trust?
First of all, there is a common misunderstanding. By simply referring in the Trust to an asset or property–such as by listing them on an attached Exhibit–does not put the asset into the Trust. We often see clients who had a Trust established years ago and they bring it in for an update. We’ll ask “what assets are in the Trust?” The client will often answer, “Look at the items listed on the exhibit attached to the Trust.” That’s when we explain that merely referring to an asset does not put it in the Trust. Affirmative steps must be taken to actually get each asset or property into the Trust.
How to accomplish funding the Trust depends on the type of asset or property. To elaborate on that in more detail, some assets are actually re-titled into the name of the Trust and in other cases, the Trust is simply named as the beneficiary or pay-on-death (“POD”) designee. With some assets, you can either re-title or name the Trust as beneficiary. Some examples my help:
Real Estate. In order to get real property into the Trust, title must actually be transferred into the name of the Trust. This typically involves the owner signing a deed from their individual name to their name as Trustee of their Trust. So, for example, Mary Smith would sign and record a Deed from “Mary Smith” to “Mary Smith, Trustee of the Mary Smith Living Trust dated May 1, 2019.” If Mary does not sign and record a deed in the public record, the property is not “in” the Trust even if the Trust makes reference to it. The result would be that on Mary’s death, the property likely would end up in probate.
Financial Accounts (such as checking, savings, money-market, brokerage). With most financial accounts (not including IRA’s and 401K’s), there are two ways in which to get the assets into the Trust. The first involves actually re-titling the account into the name of the Trust. So, for example, if Mary Smith has a savings account and a brokerage account, she could contact her banker and her financial advisor and ask that each account be re-titled into the name of the Trust. Often, the result would be the name on the account would go from “Mary Smith” individually, to “Mary Smith, Trustee of the Mary Smith Living Trust dated May 1, 2019.” In some cases, the account might only be named the “Mary Smith Living Trust dated May 1, 2019.”
An alternate way to get the financial accounts into the Trust would be through a beneficiary or pay-on-death (“POD”) designation. Using this method, the account remains owned and titled as it is currently but there is added to the account the designation which will put the funds from the account into the Trust at the death of the owner. In a case such as this, the account would be owned by and titled in the name of “Mary Smith” individually but the financial institution would have in its records the designation to pay the account to the “Mary Smith Living Trust dated May 1, 2019” upon Mary’s death.
Life Insurance and Annuities. Ownership of life insurance and annuities will normally remain in the name of the owner rather than transferring ownership to the Trust. However, the life insurance policies and annuities may list the Trust as beneficiary. So, in the case of Mary Smith, Mary would own the life insurance policy but she could name the Trust as the beneficiary. At Mary’s death, the policy would pay the death benefits over to the Trust.
Retirement Accounts. For IRA’s, 401K’s, and 403B’s, ownership should always remain in the name of the individual owner. In fact, a Trust cannot own these types of accounts-only an individual person may own them. However, as with life insurance, in some instances, the owner may name the Trust as the beneficiary of the account. [The subject of these types of retirement accounts and their relation to a Trust is the subject of other blogs by this author].
In every event where a Trust is established, funding becomes an integral part of the estate planning process. Not funding a Trust leaves the planning process only half accomplished. An experienced estate planning attorney can help address this so that the Trust is fully funded.
