How to Fund a Trust: The Basics

When it comes to estate planning, creating a trust can be one of the most effective tools to manage and distribute your assets. However, the process doesn't end with drafting the trust document—funding the trust is the crucial next step. Without properly funding a trust, its benefits may be lost, and your estate could be subject to unnecessary probate proceedings. Let’s break down the essentials of funding a trust and why it’s an important part of estate planning.

What Does It Mean to Fund a Trust?

In simple terms, funding a trust means transferring ownership of your assets into the trust. This involves changing the legal title of your assets from your individual name to the name of your trust. The assets that you transfer into the trust are what your trustee will manage and distribute according to the terms of the trust when you pass away or become incapacitated.

Trust funding ensures that your trust is fully operational and can carry out the instructions you've laid out in the trust agreement. If you don’t fund the trust properly, any assets outside the trust will need to go through probate, which can be time-consuming and costly.

Key Steps in Funding a Trust

1. Identify the Assets to Transfer

The first step is to review all your assets and determine which ones should be transferred to the trust. These assets can include:

• Real estate

• Bank accounts

• Investment accounts

• Stocks and bonds

• Life insurance policies

• Business interests

• Personal property (jewelry, artwork, collectibles, etc.)

It’s essential to take stock of your assets and decide which ones make sense to transfer. Some assets may not be suitable for a trust, or you may choose to handle them through other estate planning tools.

2. Transfer Ownership of Real Estate

Real estate is often one of the largest assets transferred into a trust. To move real estate into your trust, you'll need to execute a new deed transferring ownership from your individual name (or joint names if you own the property with a spouse or another party) to the trust.

This involves preparing and filing a quitclaim or warranty deed with the local county recorder’s office. It’s important to note that while this process is relatively straightforward, you should always consult an attorney to ensure the deed is properly drafted and recorded to avoid future issues.

3. Transfer Bank and Investment Accounts

For bank accounts, including savings and checking accounts, you’ll need to visit your financial institution and request to retitle the accounts in the name of the trust. This process varies by institution, but most will require you to provide a copy of the trust document and fill out some paperwork.

Similarly, for investment accounts such as brokerage or retirement accounts, you’ll need to contact the institution holding the account and work with them to transfer ownership to the trust. Keep in mind that some retirement accounts, like IRAs, cannot be placed directly into a trust without triggering tax consequences. However, you can name the trust as the beneficiary of these accounts.

4. Transfer Life Insurance Policies

Life insurance policies are often used to provide liquidity to an estate or trust. To transfer ownership of a life insurance policy, you'll need to contact the insurance company and request a change of ownership and beneficiary form. Transferring ownership of a policy to a trust can be a strategic move in some cases, especially if you're looking to ensure the proceeds are used in accordance with your estate plan.

However, it’s important to evaluate whether making the trust the owner of the policy could have any tax implications, especially for large policies that may be subject to estate taxes.

5. Transfer Business Interests

If you own an interest in a business, such as shares in a corporation, membership interests in an LLC, or a partnership interest, transferring that interest to a trust can ensure the business continues in accordance with your estate plan. The process for transferring business interests depends on the type of business entity and its governing documents.

Some business structures have restrictions on transferring ownership, so it's crucial to consult an attorney who can guide you through the process and help you navigate any potential roadblocks.

6. Transfer Personal Property

Personal property can also be transferred to your trust, although the process may be simpler than retitling real estate or financial accounts. For high-value personal property, like artwork or antiques, you may wish to include these items in the trust by specifically listing them in the trust document.

Alternatively, you can create a general assignment of personal property, which is a legal document that transfers all personal items not specifically listed in the trust document to the trust. This step can ensure that all of your belongings are covered without needing to individually list smaller assets.

Why Proper Funding is Critical

Failing to fund your trust or only partially funding it can lead to unintended consequences. If you don't retitle your assets into the trust, those assets will not be governed by the trust, and your estate may end up going through probate.

Additionally, a properly funded trust can:

• Avoid probate: Assets inside the trust avoid probate, allowing for faster distribution to your beneficiaries.

• Provide privacy: Trusts are not public records like wills, so they can keep the details of your estate and beneficiaries private.

• Ensure control: A trust allows you to specify exactly how and when your assets are distributed, particularly important if you have young children, special needs beneficiaries, or want to ensure long-term care for loved ones.

Creating a trust is a powerful estate planning tool, but it’s only effective if properly funded. The process of funding a trust involves transferring legal ownership of your assets to the trust, ensuring that the trust can manage and distribute your assets as intended. By taking the time to fund your trust correctly, you can avoid probate, provide for your loved ones, and ensure that your estate plan is carried out as you wish.