Some of you may be thinking, “I signed my trust, now what?” Now it is time to fund your trust… you must put something in it!
A trust is a document that creates a legal entity. There are various reasons to create a trust. Some people create trusts to avoid probate at death, to protect assets, to gain eligibility for Medicaid, or for tax efficiency. All too often, a trust is drafted but the next step of funding the trust is forgotten or ignored. This is a fatal mistake to achieving the goals of creating the trust in the first place.
So how do you fund a trust? Trust funding simply means changing the ownership of an individual asset so that the trust, rather than the individual, is the owner of record.
This is the case for both revocable and irrevocable trusts. The method of placing assets in the trust depends upon the type of asset. For some assets the trustee will have to open a new trust account in the name of the trust and move assents into it. In other cases, the financial institution provides a form to retitle the account in the name of the trust, not altering the account number. If you are putting real property in the trust, then your attorney will prepare a deed transferring the property from you to your trust. While you are living, it is not advisable to transfer ownership of retirement funds to a trust because of the adverse tax consequences. This goes for all tax deferred accounts including IRA’s, 401K’s and 403B’s.
Depending on the type of trust you created, you may be your own trustee or named some other person or entity to serve as trustee. If the creator and the trustee are not the same person, both are involved in the funding process. Once an asset is transferred into the trust, it is the trustee’s responsibility to manage. This includes investing and reinvesting, leasing out property, and, in some cases, making distributions to beneficiaries.
For example, if the trust owns rental property, the trustee will sign the lease with the tenants, collect rents, and distribute them as per the terms of the trust document. To sell the property, the trustee will enter into the contract of sale and be present at the closing. The trustee will also accept the proceeds of sale and be responsible for managing those assets.
The trustee should keep good records of the trust property, distributions and expenses. Once the ownership of an asset is transferred into the trust, it should be documented on a Schedule A attached to the trust document. Note that merely listing an asset on the Schedule A does not achieve transfer of ownership. Keeping a current list of assets owned by the trust makes administration of the trust easier. It certainly will help with the transition to a successor trustee down the road, should that become necessary. Moreover, accurate records support the goal of transparency.
With a well-drafted trust and proper legal guidance, a trust is an excellent estate planning vehicle. Not only does a trust avoid the surrogate court process at death, it is can be endlessly tailored to a particular family’s circumstance. Speak to an estate planning attorney to see if a trust is the right fit for you.