When a Trust Isn’t Enough: Why Funding Matters

What Does it Mean to Fund a Trust?

Funding a trust means transferring assets into the trust or coordinating assets so they pass to the trust at death. This may include retitling bank accounts, brokerage accounts, real estate, and other assets into the name of the trust. It may also involve updating beneficiary designations where appropriate. Without this step, the trust may exist on paper, but it may not control the assets it was intended to govern.

This is especially important for married couples with taxable estates. Many estate plans are structured so that, upon the first spouse’s death, assets are divided between a marital share and a non-marital or family trust share. This type of planning may be used to provide for the surviving spouse, preserve estate tax exemptions, and control how assets ultimately pass to children or other beneficiaries after the surviving spouse’s death.

What Happens If a Trust Is Not Funded?

If the trust is not funded, that structure will not work as intended. For example, if most assets remain titled in one spouse’s individual name, or pass directly to the surviving spouse by joint ownership or beneficiary designation, the trust may not receive the assets needed to fund the tax planning intended shares. This can disrupt the tax planning built into the document and may leave the surviving spouse with assets outright, rather than in a structure designed to preserve flexibility and reduce estate tax exposure.

This issue is particularly significant in New York because New York does not have portability. Under federal law, a surviving spouse may be able to use a deceased spouse’s unused federal estate tax exemption if a timely estate tax return is filed. New York, however, does not allow the surviving spouse to use the deceased spouse’s unused New York estate tax exemption. As a result, if the first spouse’s exemption is not used through proper trust funding and planning, that opportunity may be lost.

Funding also affects more than taxes. A trust may provide continuing trusts for children, creditor protection, divorce protection, or protections for beneficiaries who should not receive assets outright. Those provisions apply only to assets that actually pass into the trust. Assets left outside the trust may pass under a will, by beneficiary designation, or by joint ownership, which may produce a very different result.

What About Pour-Over Wills?

A common misconception is that a pour-over will solves the problem. A pour-over will can direct probate assets into a trust after death, but it does not avoid probate. If assets are left in an individual’s name, the executor may still need to petition the Surrogate’s Court before those assets can be transferred. This can create delay, expense, and court involvement that the trust was designed to minimize.

Similar Risks Apply to Irrevocable Trusts

Irrevocable trusts require the same attention. These trusts are often created for asset protection, Medicaid planning, or estate tax planning. If the assets intended to be protected are never transferred to the irrevocable trust, the planning goal may not be achieved. Similarly, if new assets are acquired later and not coordinated with the trust, the protection may be incomplete.

Establishing a Trust Is Just the First Step

Funding is the implementation of the estate plan. As assets change, accounts are opened, real estate is purchased or sold, and beneficiary designations are updated, the trust should be reviewed to confirm that the ownership of assets still matches the plan.

A well-drafted trust is only one part of the process. Proper funding is what allows the plan to operate in practice, preserve intended tax benefits, avoid unnecessary probate, and protect beneficiaries in the way the client intended.

By Alma Muharemovic, Esq. 

Alma Muharemovic, Esq. is an associate attorney at Burner Prudenti Law, P.C. focusing her practice areas on Estate Planning. Burner Prudenti Law, P.C. serves clients from New York City to the east end of Long Island with offices located in East Setauket, Westhampton Beach, Manhattan and East Hampton.