Funding a Living Trust – Avoid These Common Mistakes

A surprising number of people go to the trouble of hiring an attorney, explaining their wishes, designating beneficiaries and a successor trustee, and paying to have a trust created, only to drop the ball on the final step. A living trust can smooth the process of transferring assets to beneficiaries, help keep the assets and recipients private, and avoid the need for probate. However, those benefits are only realized if the grantor follows through on placing assets in the trust, and is vigilant about titling newly-acquired assets to the trust, as well.

Posted on July 10, 2018

Must all Property be Title to the Trust?

Not necessarily, but it’s important to assess which property should be transferred to the trust in the grantor’s lifetime. Most general assets such as real property, bank accounts, vehicles, and investment accounts While a living trust will typically be accompanied by a pour over will to ensure that any property still in the grantor’s name goes into the trust for distribution, leaving significant property outside the trust can defeat the purpose.

For example, property passing to the trust through a pour over will typically necessitates use of the probate process, which in turn eliminates some of the privacy associated with providing for beneficiaries through a trust.

However, some assets may pass outside the probate process. For example, a retirement account with the owner’s spouse listed as beneficiary will transfer to the spouse directly, without passing through probate. While the grantor may choose to make the trust the beneficiary of the retirement account (wit a waiver from his or her spouse), that’s purely a matter of personal choice. The process won’t be compromised by having the account pass directly. The same is true for certain property held jointly with rights of survivorship.

Funding a Living Trust Initially

Funding a living trust takes a bit of work. First, you must make a diligent inventory of your property. That means your home, other real estate, bank accounts, investment accounts, retirement accounts, cars, boats, and more. Identify everything that you own and may be leaving behind for your beneficiaries.

Next, consider which property should be transferred to the living trust and which will be passed through another channel, such as joint ownership with rights of survivorship or a listed beneficiary. Note that you may choose to make the trust the beneficiary of an account—your estate planning attorney can explain the pros and cons of having the asset pass directly to a beneficiary or be transferred to the trust upon your passing.

Finally, make the individual transfers through the process appropriate to each. For example, you will deed real property to the trust, transfer title to vehicles, and create new signature cards with your bank. In addition to the time investment required, the initial transfer process may require some financial investment. For instance, there is a fee associated with vehicle title transfer.

Maintaining Your Living Trust

In the typical living trust structure, the grantor is initially both trustee and beneficiary. That means there’s little difference in the way funds and other assets are used after creation of the living trust. Property that is held by the trust can be sold, with the proceeds going into the trust to be managed by and for the benefit of the grantor during his or her lifetime. However, this simple use and transfer of trust assets makes it easy to forget the importance of legal title to the assets. For example, when the grantor-trustee sells his or her car and purchases a new one, the new vehicle must be registered to the trust, not to the individual. Similarly, new bank accounts, investments, real estate and other property acquired after creating and initially funding a living trust trust must be assessed for appropriate titling, just as existing assets were at the outset.

It’s easy to overlook an asset or to make a mistake as to whether or not an asset should be titled to the living trust or the living trust should be listed as beneficiary. An experienced estate planning attorney can help you ensure that your living trust operates as intended.

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