One of the most common reasons people cite for preparing their estate plan is that they want to avoid probate and keep their affairs private. What is probate? Probate is the court process of confirming the validity of the deceased persons’ will (if any) and transferring the assets from the deceased person to the heirs. This process varies from state to state with some states being more difficult than others. People want to avoid probate is because it is a public court proceeding and they would prefer that their affairs be kept private. In addition, many people want to streamline the administration process for their loved ones and reduce administration expenses.
There are a number of strategies to avoid probate. One common strategy is to use a revocable living trust instead of a will or joint ownership as the foundation of the estate plan. When properly prepared, a living trust avoids the public, costly, and time-consuming probate process. But how? By fully funding the trust.
How You Fund Your Trust?
Funding a trust is simply the process of transferring assets, property, and accounts from your name into the name of your trust. In some cases, you may also want to modify your beneficiary designations to name your trust as a beneficiary (for example, making your trust the beneficiary of your life insurance policy).
Funding is accomplished in several different ways:
- Changing the title of the asset from your individual name (or joint names if you’re married) to the name of your trust – for example, from Bud Jones to Bud Jones, Trustee of the Bud Jones Living Trust dated June 1, 2020.
- Assigning your interest in an asset without a title to your trust (such as artwork, jewelry, collectibles, or antiques).
- Changing the primary or contingent beneficiary of the asset to your trust.
Funding your trust is you transferring your assets to your trust while you’re alive and able instead of your loved ones transferring your assets after passing during the probate process.
What Happens to Assets Left Out of Your Trust?
Many people create trusts so that they can avoid probate after passing. Unfortunately, some people believe that once they’ve signed the trust they don’t need to take any other steps. This is a common misunderstanding that can result in love ones having to go to the probate court. The trust will still work, but your loved ones may have to go to the probate court to make it happen. Probably not what most people intended.
Which Assets Should Be Funded Into Your Trust? Which Assets Should Be Left Out?
In general, following assets are typically funded into your trust:
- Real estate
- Bank accounts
- Safe deposit boxes
- Investment accounts
- Life insurance
- Business interests
- Intellectual property
- Oil and gas interests
- Water rights or shares (especially in some states where they can be quite valuable)
- Personal effects – artwork, jewelry, collectibles, antiques
On the other hand, you should probably not fund your trust with the following assets:
- IRAs and other tax-deferred retirement accounts – only the beneficiary should be changed
- Incentive stock options and Section 1244 stock
- Interests in professional corporations
- Foreign assets – in some countries, funding an asset into a U.S.-based trust causes adverse tax consequences, while in other countries, trusts aren’t recognized or are ignored due to conflicting laws
- UTMA and UGMA accounts – your minor grandchild is the owner, you are merely the custodian; instead, name a successor custodian
- Cars, trucks boats, and motorcycles – Arizona allows a small amount of assets, including vehicles, to pass outside of probate via an affidavit procedure; another option is to designate a beneficiary for vehicles to avoid probate entirely (Arizona Motor Vehicle Division has a form on their website)
There are legal and tax reasons why certain assets should and shouldn’t be included in your trust. This is an important analysis that should be done with your estate planning lawyer. When we create a trust for a client, we review the client’s assets to determine what should go into your trust, what should stay out, and what beneficiary designations need to be updated. We also create a custom action items list for each client to assist with the trust funding process.
What Are the Benefits of Funding Your Trust?
Funding your trust makes it possible to obtain the best results from your estate plan:
- Your trustee (someone you know and trust and have chosen for this role), instead of a probate court, will take control of your trust assets after your death, and manage and distribute the assets to your chosen beneficiaries without court involvement.
- Your trust will be easier to update as your wishes and circumstances change. Instead of updating instructions on each account (such as joint ownership or pay on death/transfer on death designations), you can just update your trust and those updates will apply to all of your assets owned by the trust.
- Your final wishes will remain a private family matter instead of being publicized in the local probate court records.
- The trust administration process is often quicker and less expensive than the probate process.
Trust Funding – Why It Matters
Many people like the privacy of avoiding the probate court, streamlining the administration process, and saving the time and cost associated with a probate procedure. Funding your trust while you’re alive means your loved ones won’t have to transfer your assets in the probate court after passing. When the goal is to make things easier on your loved ones after passing, funding your trust is the way to do it.
We prepare trust as part of the comprehensive estate plans we prepare for our clients. Call us today at 480-699-7992 to discuss how a trust could work for you.