By Tim Barkley. March 2013.
Now that you’ve set up your living trust, you need to feed it to make it grow. In legal parlance, you need to “fund” your trust. The benefits of a living trust – probate avoidance, privacy, efficiency, estate tax avoidance – may be lost if you do not take the time to fund your trust and maintain it.
“Funding” your trust means transferring title to your assets to your trust. Funding also includes making your trust the primary or contingent beneficiary of your retirement and insurance assets. Please note: the discussion here is general in nature, and not tailored to your specific situation. Seek professional counsel!
You may recall from our last article that when you set up a living trust, you control the trust as the “grantor” or “settlor” (the person who can revoke and amend the trust). You control the trust assets as “trustee” (the person who manages the trust). You control and manage trust assets for yourself, as “beneficiary” of the trust. So, during your life you are only accountable for your trust management to yourself. No one can use your trust to make you do anything you wouldn’t have to do otherwise.
When you die or become unable to manage your trust, your named successor manages the trust for your benefit if you are alive. If you have died, your successor trustee manages and distributes trust assets to or for the benefit of your loved ones, according to the terms of your trust. So even after your death, you can maintain control of your assets for the benefit of your loved ones, as you see fit.
You no longer own your assets, but you control them through your trust. While this distinction may seem legalistic and arcane, it is important. It is the basis of probate and estate tax avoidance. None of the assets owned by your trust are subject to probate, and proper ownership is the foundation of tax avoidance planning.
All of the assets solely owned by you and not in the trust are subject to probate. And insurance and retirement beneficiary designations not coordinated with your trust beneficiary provisions can “unwind” your careful planning. Only imagine the effect of an insurance policy beneficiary designation – in the name of an ex-spouse.
The process of funding your trust is different for different assets and different situations. For example, real estate can only be transferred by a notarized deed that should be recorded in the county land records. Tangible personal property can be transferred to the trust without any written record, but a memorandum of transfer to the trust is advisable. For a more complete description of the means to fund your trust, navigate to this author’s webpage at barkleylaw.com.
And seek professional guidance. Every situation is unique, and mistakes in funding your trust can have immediate and long-lasting repercussions. Mistakes in handling IRAs can cause immediate income taxation of the entire balance. Mistakes in beneficiary designations can lose your beneficiaries the benefit of income tax deferral on your IRA or 401(k) balance at your death – and can even send a substantial portion of your overall assets to the wrong beneficiary!
Don’t wait to fund your trust. Several clients of this author have decided to put off funding until later, only to die before they funded their trust. The entire estate has had to be administered through the probate process to transfer it to the trust. The not-insignificant cost was, of course, ultimately borne by the beneficiaries of the trust.
If you don’t take the time to maintain the funding of your trust, all your hard work can be undone and your investment in trust planning wasted. One of this author’s clients funded her trust with a substantial brokerage account. She then changed brokers and opened the new account in her own name, and not in the name of the trust. When she died, the entire account had to be run through the probate estate administration process to transfer it to the trust and thence to the children. The cost was borne by her children.
Sometimes the funding of your trust is imperative to accomplish estate tax avoidance goals. The federal estate tax exemption, in excess of five million dollars, virtually eliminates that tax as a concern for most of us. The Maryland estate tax exemption, on the other hand, is only one million dollars. Between the primary residence, life insurance and retirement plans, many of us have estates subject to that tax. If you have utilized trust planning to avoid the estate tax, delays in funding or failure to maintain funding can jeopardize that tax avoidance planning and subject your loved ones to substantial tax liability.
You have made a significant investment in your trust. Secure it through proper trust funding. Consult the drafter of your trust, or another qualified professional, for counsel and assistance.
Attorney Tim Barkley
The Tim Barkley Law Offices
One Park Avenue
P.O. Box 1136
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