Once you’ve created an estate plan and signed your living trust, the next step is to “fund” your living trust with your assets. Trust funding is the process of changing the formal title and ownership of your assets to the name of your trust. Then, upon your death, all property in the name of your trust can be distributed in accordance with your terms.
Oftentimes, this last step confuses clients. For example, many individuals hold the common misconception that upon signing a trust, they’ve taken all proper measures to ensure their estate avoids California probate. However, there are consequences to failing to fund a trust.
The Importance of Funding a Living Trust
You can easily compare trust funding to the way a corporation works. For example, a corporation may have a bank account, own a vehicle, and perhaps even own real estate. Likewise, a bank account, vehicles, and real estate can be held under the name of a trust.
Although some assets don’t have a formal legal title, such as household goods and furniture, any asset that has a designation of formal ownership should to be changed to show ownership in the trust name. This official beneficiary designation in the trust name is funding a living trust.
Keep in mind that some assets have direct beneficiary options. Some examples include life insurance policies or accounts with a beneficiary designation. You may not need to control such assets with a trust. Therefore, you should assess each type of asset, whether property, retirement plan, life insurance, or bank account, to determine whether it should be controlled by a trust.
What happens when you don’t fund a trust?
Sometimes, an individual creates their trust but fails to properly fund it or keep it funded. For example, when a new asset or property is acquired after the trust was created, people sometimes overlook putting the name of the trust as title holder. Believe it or not, this is the number-one reason estate plans fail to work as intended.
A living trust is one of easiest vehicles for effective estate planning. Plus, when a legal document assistant prepares living trusts, clients save a ton of money.
However, permanent, one-time trust funding does not exist. Remember that funding a living trust is an ongoing process that you will have to revisit throughout your lifetime. Therefore, once you’ve set up your trust, always be cognizant of any major changes to your assets. Such changes may include closing or opening bank accounts or buying or selling real property or other major assets.
Keep in mind: You must fund your trust immediately after signing, and then you must consider the need to move later acquired assets into your trust as they change.