Estate Planning: Funding Your Revocable Living Trust

Takeaways

• A revocable living trust is a valuable estate planning tool that helps manage finances during life and incapacity and provides financial security for loved ones after death – primarily by avoiding the legal process known as probate.
• “Funding” a trust means transferring ownership of your accounts and property to the trust during your lifetime, or designating the trust as a beneficiary, which is crucial for the trust to function as intended and for your successor trustee to manage your affairs effectively.
• Beneficiary designations and joint ownership override the instructions in your trust. To avoid surprises and unintended outcomes, it is essential to regularly review and align these with your estate planning goals to ensure assets are distributed as intended.

A revocable living trust is a valuable estate planning tool. It not only allows you to remain in control of your finances remain while you are alive and ensures they remain well managed if you become unable to manage them yourself (known as becoming incapacitated), but also can provide lasting financial security for your loved ones after your death. However, merely signing the trust agreement does not complete the process. To work properly, you also must fund the trust.

What Does It Mean to ‘Fund’ a Trust?

One of the main reasons people create a revocable living trust is to stay in control of their accounts and property during their lifetime, ensure their finances are managed if they become incapacitated, and provide inheritances for loved ones upon their death. Without funding your trust, however, it is little more than an empty container.

Trust funding is the process of transferring the ownership of your accounts and property to your trust during your lifetime. (For some assets, this process also includes designating the trust as a beneficiary, which will cause those assets to transfer into the trust when you pass away.)

Fully funding your trust will help you, as the trust’s creator (also called a grantor, settlor, or trustmaker), and your loved ones avoid the costly, time-consuming court process known as probate. Probate is a legal procedure where a court oversees the distribution of a deceased person’s assets. During probate, the court will validate the will (if there is one), appoint an executor (sometimes called a personal representative or administrator), and ensure that debts and taxes are paid before distributing the remaining assets to beneficiaries or heirs.

Note that with a revocable living trust, you will likely serve as the trustee while you are alive and well. If you become incapacitated or when you pass away, trust management transitions to a trusted individual or organization whom you have chosen to step in. This successor trustee then takes on the responsibility of administering the trust.

Fully funding your revocable trust will help your successor trustee:

• Gain access to your accounts and property more easily. Properly funding your trust gives your successor trustee greater ease in stepping in to manage the accounts and property in it if you are unable to do so. This can be incredibly important if you are incapacitated and action regarding your financial affairs must be taken right away.
• Avoid frustration and wasted time. Upon your death, one of the first things your successor trustee must provide to your named beneficiaries is a complete inventory of all the trust’s assets. If the records showing which accounts and properties are owned by the trust (or name the trust as a beneficiary)  are up to date and organized, you’ll have left behind a helpful preliminary list for your successor trustee to use in creating the inventory.
• Be well-equipped to carry out your wishes. When you create a trust, you have the opportunity to leave instructions that reflect your goals and values. However, those instructions apply only to those assets that the trust owns. If an account or piece of property isn’t owned by the trust, it will pass not under the trust agreement but according to how it is titled or whom you’ve named as beneficiary – or else it may have to go through probate.

Funding a Trust Helps Avoid Probate Court

If something isn’t owned by your trust (and is not jointly owned or set up with a beneficiary designation that names your trust), it will likely have to go through the probate court process.

During probate, the accounts or property will be transferred through your pour-over will to your trust, to be managed by your successor trustee (the trust’s new trustee).

A pour-over will is a crucial component of any trust-based estate plan. This document acts as a safety net, directing any accounts or property not funded into your trust during your lifetime or at your death by beneficiary designation to be “poured over” into the trust after your death.

While the pour-over will doesn’t contain the detailed distribution instructions found within the trust itself (such as specific beneficiaries, distribution timing, or conditions), it plays a vital role in ensuring that all your assets are ultimately managed and distributed according to the terms of your trust. This separation of details also offers your estate a degree of privacy, as the specific provisions of your trust do not become public record.

Although the instructions in your trust will eventually control what happens to any forgotten accounts or property, a pour-over will still requires your loved ones to go through probate before the unfunded assets can be transferred to the trust.

However, what if your estate plan includes a revocable living trust but not a will (pour-over or otherwise)? Dying without a will in place – even if you have a trust – is known as dying intestate. In that situation, the court will not transfer your probate assets to your trust. Instead, it will rely on state law to determine who will inherit from you – typically starting with your spouse, then children, grandchildren, parents, and siblings, depending on who is living at your death.

The downside of using state law rather than the instructions in your trust is that your accounts or property could be given to someone you intended to disinherit or whom you wanted to receive only a small share. Likewise, those you may have wanted to provide for – such as stepchildren, a partner, or a favorite charity – are generally not included in estate inheritance laws and may receive nothing at all. This lack of control underscores the importance of proactive estate planning to ensure your legacy aligns with your intentions.

When Your Trust Will Not Control the Outcome

If a designate a beneficiary other than your trust on an account or piece of property, your trust will not control what happens to it. Instead, that asset will go directly to the designated beneficiary.

For example, if your trust states that all your assets should go to your children equally, but your 401(k) names your spouse as the sole beneficiary, your spouse will receive the 401(k) proceeds upon your death, regardless of what your trust says.

The same is true with jointly owned property. Depending on the form of joint ownership, when one co-owner of an account or piece of property dies, the surviving co-owner(s) automatically receive the deceased owner’s interest in the account or property upon their death. This is often referred to as a right of survivorship.

Assets that are commonly owned jointly include bank accounts, real estate, and investment accounts. The distribution of such assets is governed by the joint ownership agreement, not by your trust document.

Given these factors, it is critically important to ensure that your current beneficiary designations and the titling of your jointly owned property are up to date and precisely align with your overall estate planning goals.

A discrepancy can lead to unintended consequences, diverting assets away from your intended beneficiaries and potentially causing complications or disputes for your loved ones. Regularly review all your beneficiary designations and property titles to confirm they reflect your current wishes and are consistent with your comprehensive estate plan. This proactive approach helps to ensure that your assets are distributed exactly as you intend, providing peace of mind for you and your family.

Additional Reading

• Understanding the Common Types of Trusts
• What to Do and Not Do With Your Estate Planning Documents
• Be Careful Not to Name Your Minor Children as Beneficiaries
• Execute a Durable Power of Attorney Before It’s Too Late
• A Useless Power of Attorney: Avoid Free Legal Documents
• Benefits of Life Insurance as Part of Your Estate Plan