We know that it is daunting and downright difficult for some to set up their estate plan. People are forced to think about the inevitable and make these decisions about who will do what and how their assets will be divided. The final signing appointment is usually followed by a sigh of relief with the estate planning binder going onto a shelf to collect dust, with the thought that a great weight has been lifted off of their shoulders and there is now a plan in place should anything happen.
But wait, there’s more….
Most people do not sit down and take the time to read through their estate planning binders after the last review with the attorney or legal staff. Or, if they do read through it, they may go cross-eyed with the legal jargon and boilerplate language. A lot of times, people skip over the most important part of estate planning: funding the trust!
To put it simply, a trust is a naming convention, or a label, on a bucket. You want to put all the assets that you can into that bucket. In order to actually put the assets in the bucket, you must retitle them so that they match the title or label on the bucket. Because the title to your home lives at the county recorder’s office and your bank and brokerage accounts live at the financial institutions that manage them, you cannot physically put them in your bucket. You must retitle them so that the place where they live knows they belong in your trust.
If you do not retitle your house with a deed or rename your bank accounts through your chosen financial institution’s paperwork, then the recorder and the bank will not honor your trustee when he or she goes to gather your assets up so they can administer your trust. This will result in a probate, which is not the purpose for which you just spent time, money, and effort creating your estate planning documents.
Here are the most common assets that end up causing a probate within a trust administration:
- Property that is held jointly with family as tenants in common: joint tenancy will work with a right of survivorship, but creating a joint tenancy has very specific requirements and the default way of holding title is as tenants in common. Tenants in common means the owners can do what they want with their share, such as gift it, sell it, or bequeath it via a will or trust, but if it’s not in the trust, then it must be probated.
- Inherited property that was not retitled: if you inherit a home, a bank account, even an IRA, even though it is now yours by operation of law (meaning the person who left it to you has died and it is automatically yours), if you do not take care of the proper paperwork to either retitle the assets in your name and trust or designate new beneficiaries, then if something happens to you, there are no named beneficiaries and the asset goes to probate.
Here are the basics that should go into your trust directly:
- Bank accounts
- Real estate
- Brokerage / investment accounts
- Stocks / mutual funds
- Homeowner’s insurance
- Business interests (corporations, LLCs, partnerships, sole proprietorships)
- Life insurance (Trust should be named as beneficiary)
What does not go into your trust:
- Stock options
- Any other tax deferred plans
These tax deferred accounts, or assets not yet vested, do not go into your trust, but you can, and should, designate beneficiaries for these accounts in line with the distribution plan for your trust. There may be instances where you want the trust to be the beneficiary of these plans, but please consult with your attorney first.
The good thing about funding a trust is that typically you only have to do it once. If you update your trust in the future, you do not have re-do the funding. The original title and date of the trust remain the same. Any assets you get rid of, such as selling a house or closing a bank account, has no effect on the trust. Opening a new account, or purchasing real estate, you can just be sure to do so in the name of your trust, no need to update your estate planning documents unless you are making changes to distributions because of these new assets. Remember, a good estate planning attorney will always be there to answer your funding questions.