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Saturday, February 15, 2014

What Does the Term "Funding the Trust" Mean in Estate Planning?

If you are about to begin the estate planning process, you have likely heard the term "funding the trust" thrown around a great deal. What does this mean? And what will happen if you fail to fund the trust?

The phrase, or term, "funding the trust" refers to the process of titling your assets into your revocable living trust. A revocable living trust is a common estate planning document and one which you may choose to incorporate into your own estate planning. Sometimes such a trust may be referred to as a "will substitute" because the dispositive terms of your estate plan will be contained within the trust instead of the will. A revocable living trust will allow you to have your affairs bypass the probate court upon your death, using a revocable living trust will help accomplish that goal.

Upon your death, only assets titled in your name alone will have to pass through the court probate process. Therefore, if you create a trust, and if you take the steps to title all of your assets in the name of the trust, there would be no need for a court probate because no assets would remain in your name. This step is generally referred to as "funding the trust" and is often overlooked. Many people create the trust but yet they fail to take the step of re-titling assets in the trust name. If you do not title your trust assets into the name of the trust, then your estate will still require a court probate.

A proper trust-based estate plan would still include a will that is sometimes referred to as a "pour-over" will. The will acts as a backstop to the trust so that any asset that is in your name upon your death (instead of the trust) will still get into the trust. The will names the trust as the beneficiary. It is not as efficient to do this because your estate will still require a probate, but all assets will then flow into the trust.

Another option: You can also name your trust as beneficiary of life insurance and retirement assets. However, retirement assets are special in that there is an "income" tax issue. Be sure to seek competent tax and legal advice before deciding who to name as beneficiary on those retirement assets.


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