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Understanding Funding Your Living Trusts

  1. What is "funding" my trust?
  2. Who controls the assets in my trust?
  3. Why is funding my trust so important?
  4. What happens if I forget to transfer an asset?
  5. Who is responsible for funding my trust?
  6. How difficult is the funding process?
  7. Which assets should I put in my trust?
  8. Will putting real estate in my trust cause any inconveniences?
  9. What about my IRA and other tax-deferred plans?
  10. What about property that doesn't have a title?
  11. What if I buy new assets after I fund my trust?
  12. Funding Your Living Trust (Summary)


1. What is "funding" my trust?
Funding your trust is the process of transferring your assets from you to your trust. To do this, you physically change the titles of your assets from your individual name (or joint names, if married) to your name(s) as trustee(s) of your trust. 



2. Who controls the assets in my trust?
The trustee you name will control the assets in your trust. Most likely, you have named yourself as trustee, so you will still have complete control. One of the key benefits of a revocable living trust is that you can continue to buy and sell assets just as you do now. You can also remove assets from your living trust should you ever decide to do so. 



3. Why is funding my trust so important?
If you have signed your living trust document but haven't changed titles and beneficiary designations, you will not avoid probate. Your living trust can only control the assets you put into it. You may have a great trust, but until you fund it (transfer your assets to it by changing titles), it doesn't control anything; your living trust can only control the assets you put into it. If your goal in having a living trust is to avoid probate at death and court intervention at incapacity, then you must fund it now, while you are able to do so.



4. What happens if I forget to transfer an asset?
Along with your trust, your attorney will prepare a "pour over will" that acts like a safety net. When you die, the will "catches" any forgotten asset and sends it to your trust. The asset will probably go through probate first, but then it can be distributed according to the instructions in your trust.



5. Who is responsible for funding my trust?
You are ultimately responsible for making sure all of your appropriate assets are transferred to your trust. Typically, you will transfer your assets to your trust. Wright & Wright is unique in that we assist you with the initial funding of your trust and the review of your beneficiary controlled assets.  



6. How difficult is the funding process?
It's not difficult, but it will take some time. Because living trusts are now so widely used, you should meet with little or no resistance when transferring your assets. At Wright & Wright, we adopt a "team" approach to fuding.  Our firm can assist you with preparing the transfer documents for most assets, but for such things as bank accounts, you will need to go your financial institution to sign new signature cards.

Some institutions will want to see proof that your trust exists. To satisfy them, Wright & Wright prepares a Certificate of Trust. This is a shortened version of your trust that verifies your trust's existence, explains the powers given to the trustee and identifies the trustees, but it does not reveal any information about your assets, your beneficiaries and their inheritances.

While the process isn't difficult, it's easy to get sidetracked or procrastinate. The team at Wright & Wright is here to help and encourage.  As part of planning process, we have created a Trust Financial Statement, which guides and documents when there is a change in title. Remember why you are doing this, and look forward to the peace of mind you'll have when the funding of your trust is complete.



7. Which assets should I put in my trust?
The general idea is that all of your assets - bank accounts, investment accounts, business interests, notes payable real property, etc. should be in your trust. The common exceptions are annuities, IRAs and retirement plans,



8. Will putting real estate in my trust cause any inconveniences?
In most cases, you will notice little difference. Wright & Wright will assist you by preparing the deed(s) to your real property. Should you decide to refinance or get an equity line of credit, the lender may request you take the property out of trust ownership until the loan is funded.  While this can be annoying, it is a minor inconvenience that is easily satisfied. 

Because your living trust is revocable, transferring real estate to your trust should not disturb your current mortgage in any way. Even if the mortgage contains a "due on sale or transfer" clause, retitling the property in the name of your trust should not activate the clause. There should be no effect on your property taxes because the transfer does not cause your property to be reappraised. Also, having your home in your trust will have no effect on your being able to use the capital gains tax exemption when you sell it.

Also, having your trust as the owner on your homeowner, liability and title insurance may make it easier for a successor trustee to conduct business for you. Check with your agent.



9.  What about my IRA and other tax-deferred plans?
Do not change the ownership of these to your living trust. Talk to your attorney before you can name your trust as the beneficiary.  There are stand alone retirement trusts you may want to consider.  The most common beneficiaries include your spouse; children, grandchildren or other individuals; a charity; or a combination of these. Whom you name as beneficiary will determine the amount of tax-deferred growth that can continue on this money after you die.

Most married couples name their spouse as beneficiary because 1) the money will be available to provide for the surviving spouse and 2) the spousal rollover option can provide for many more years of tax-deferred growth. (After you die, your spouse can "roll over" your tax-deferred account into his/her own IRA and name a new beneficiary, preferably someone much younger, as your children and/or grandchildren would be.) A nonspouse beneficiary can also inherit a tax-deferred plan and roll it into an IRA to continue the tax-deferred growth, but only a spouse can name additional beneficiaries.

Of course, any time you name an individual as beneficiary, you lose control. After you die, the beneficiary can do whatever he or she wants with this money, including cashing out the account and destroying your carefully made plans for long-term, tax-deferred growth. The money could also be available to creditors, spouses and ex-spouses, and there is the risk of court interference at incapacity.

Naming a stand alone retirement trust as beneficiary will give you maximum control because the distributions will be paid not to an individual, but into a trust that contains your written instructions stating who will receive this money and when. After you die, distributions will be based on the life expectancy of the oldest beneficiary of the trust. You can also set up separate trusts for each beneficiary so that each one's life expectancy can be used.

The rules for these plans have recently been made simpler, but it is still easy to make a costly mistake. Because there is often a lot of money at risk, be sure to get our expert advice.



10.  What about property that doesn't have a title?
Personal property (artwork, clothing, jewelry, cameras, sporting equipment, books and other household goods) typically does not have a formal title. We will prepare an assignment to transfer these items to your trust.



11. What if I buy new assets after I fund my trust?
Find out if you can take the title initially as trustee of your trust. If not, transfer the title right away. If you're not sure how to transfer it, contact our office for instructions.


 
12. Funding Your Living Trust (Summary)
Assets You Probably Want in Your Living Trust
• Real property (home, land, other real estate)
• Bank/credit union accounts, safe deposit boxes
• Investments (CDs, stocks, mutual funds, etc.)
• Notes payable (money owed to you)
• Business interests, intellectual property
• Oil and gas interests, foreign assets
• Personal untitled property

Assets You May Not Want in Your Living Trust
• IRA and other tax-deferred retirement accounts
• Incentive stock options and Section 1244 stock