It may be more difficult and riskier than simply using a living trust.
Why Funding Your Trust Is Important and How to Do It
A brief overview of how to fund your living trust
We created this guide to give you a brief overview of how to fund your living trust so your living trust can do what it is meant to do for you and your family.
Your living trust is a very important document for you and your family, but failing to properly fund your living trust can spoil your careful estate planning. You want to set up you and your family for success.
What is “Funding a Living Trust”?
To make your living trust effective, you must fund it. “Funding your trust” means transferring your assets to your trust.
Why do you have to transfer your assets to your trust?
Because if you don’t, your estate will go through probate. It’s not enough to have a living trust, you have to transfer your assets that would go through probate to the trust. Transferring property and other assets is just as important as creating the estate plan in the first place.
What assets go through probate?
Real property worth more than $61,500 and other assets, such as bank accounts and brokerage accounts, worth more than $184,500 in total, will go through probate
But if you have probate assets and transfer those assets to your living trust, your family can avoid probate.
However, this does not happen automatically when you sign your living trust documents. You must actually sign documents to make it happen.
Real Property. Before you set up your living trust, the title to your home was in your name or you and your spouse's name - Joe and Nicole Smith, Husband and Wife, as Joint Tenants, or some version of that. To transfer your home, or any other real property to your trust, your have to sign, notarize and record a deed that transfers title from you to your trust. Usually your estate planning will do this when you do your estate planning.
When you title your property in the name of a living trust, there is no reassessment of your California real property under Proposition 13.
If you refinance your mortgage, the escrow officer may make you transfer title back to your name as part of the refi. Make sure they transfer title back to your trust as part of the process.
Bank and Brokerage Accounts. Generally, you should change ownership of your bank and brokerage accounts to your living trust.
If your account is your name, you need to change ownership of the account to your name, trustee of the your name family trust. Your financial institution will want to see a copy of your living trust and will make you complete their paperwork to authorize the ownership change.
Life Insurance Policies. We generally recommend you name your spouse as the primary beneficiary and your living trust as the contingent beneficiary of your life insurance policies.
You will need to complete the life insurance company’s change of beneficiary forms to make the necessary changes. The purpose of making your living trust the beneficiary of your insurance policy is so the death benefit will be distributed according to the terms of the trust.
Do not name minor children as beneficiaries, because the insurance company may require probate before it will allow a payout to the guardians of minor children. Better to name your living trust as the contingent beneficiary.
Retirement Plans. We generally recommend you name your spouse as the primary beneficiary and your children as contingent beneficiaries of your retirement plans. Retirement plans, including IRA and 401K Plans, should not name the trust as the primary beneficiary.
However, if you have young children, or children with learning disabilities or drug and alcohol dependency problems, you may want someone you trust to oversee and manage their inherited IRA. In which case, you may want to name your trust as the contingent beneficiary, rather than your child. But naming your trust correctly on the beneficiary designation form is tricky and you may need help with this from your estate planning attorney.
Business Interests. Business interest in businesses such as LLCs and Corporations can be placed in your trust. You should speak with your attorney to make sure this is done properly.
Your other Valuables. Typically, it is not necessary to specifically transfer your other valuables, such as your cars and jewelry, into your trust. If you have particular valuables you wish to give to certain people, you can make specific gifts of these items within the trust documents. Normally, the items in your home and garage will be included in your Trust Schedule and will all be coming into your trust without needing to be specifically listed and transferred.
After Funding Your Living Trust
Don’t forget to follow these tips and title new assets into your trust as you acquire them. If you buy a new property or open a new account, you will need to title those assets in the name of the your living trust. It is important that when you acquire new assets in the future that you transfer them into your livving trust as soon as possible.
It’s a good idea to review your estate plan after any big changes in your life or every three years.