Although a Last Will and Testament remains the cornerstone of most estate plans, a trust is a popular addition to a comprehensive plan because a trust is one of most effective ways to protect your assets, provide for your loved ones, and simplify the administration of your estate after your death. Although creating the trust agreement is an important first step, it is not the last step required to create a successful trust. Unfortunately, many people use generic online forms to create a trust and mistakenly believe that their work is finished once they sign their trust documents. A trust that has never been properly funded, however, may fail to accomplish many of the goals you intended it to achieve. To help you avoid making this mistake, the Los Angeles at Schomer Estate & Wealth Advisors explain what you need to know about funding a trust in California.
What Is a Trust?
A trust is a legal arrangement in which one person or entity, known as the Trustee, holds and manages property for the benefit of one or more beneficiaries according to the terms established by the person creating the trust, known as the Trustor, Grantor, or Settlor. Unlike a Last Will and Testament, which only becomes effective upon death, many trusts become effective as soon as they are created and funded. Depending on the type of trust you establish, the trust may manage assets during your lifetime, after your death, or both.
In a typical California revocable living trust, you serve as the Grantor, the initial Trustee, and the primary beneficiary during your lifetime. Because you continue serving as Trustee, you maintain complete control over trust assets while you are alive and competent. You may buy or sell property, manage investments, amend the trust, or revoke it entirely if your circumstances change. Upon your death or incapacity, a successor Trustee you previously selected assumes responsibility for managing and distributing trust assets according to your instructions. If you create an irrevocable living trust, you usually name someone else as the Trustee to take advantage of the asset protection benefits available with this type of trust. Assets that are transferred into an irrevocable trust belong to the trust and the trust cannot be modified or revoked by you once it takes effect.
Unlike a living trust, a testamentary trust is created through a Last Will and Testament and does not become effective until after the Testator’s death. Because the Will must generally pass through probate before the trust is established, testamentary trusts do not avoid probate. They can, nevertheless, provide valuable asset management for minor children, beneficiaries with disabilities, or individuals who may need assistance managing inherited assets.
Why Funding a Trust Is So Important
Many people mistakenly believe that once they execute their trust documents, every asset they own is automatically protected by the trust, but signing a trust agreement does not automatically transfer ownership of your assets into the trust and the trust only controls assets that have actually been transferred into its ownership. Funding your trust, therefore, should be thought of as the step that allows the trust to function as intended.
If major assets remain titled solely in your individual name, several problems may arise. First, those assets may still have to pass through California probate before ownership can be transferred to your beneficiaries. One of the primary reasons many Californians establish living trusts is to avoid probate. An unfunded or partially funded trust may not accomplish that objective. Second, your successor Trustee may lack authority to manage assets that remain outside the trust if you become incapacitated. This could require the use of additional planning documents or even court intervention in some situations. Finally, inconsistent ownership can complicate estate administration, delay distributions, and increase legal expenses for your family.
What Does It Mean to Fund a Trust?
Funding a trust simply means changing ownership of appropriate assets from your individual name to the name of the trust. Instead of owning property personally (or as a co-owner), the trust becomes the legal owner while you may, or may not, continue managing those assets as Trustee. Although ownership changes legally, your practical control over the property can remain the same if you continue serving as Trustee.
Which Assets Should Be Transferred into a Trust?
Many assets can be transferred into a trust, including your primary residence, non-retirement investment accounts, bank accounts, valuable collections, and intellectual property. Each asset should be reviewed individually because transferring ownership may require different legal procedures depending on the type of property involved.
There are, however, some assets that cannot, or should not, be transferred into a trust, such as IRAs and 401(k) plans, because transferring ownership during your lifetime may trigger significant tax consequences. Instead, these accounts typically pass according to beneficiary designations. Similarly, certain health savings accounts and other tax-advantaged accounts often remain outside the trust. Life insurance policies may or may not be transferred depending on your overall estate planning objectives. In many situations, reviewing and updating beneficiary designations is more important than changing ownership.
Common Steps Required to Fund a Trust
Because every estate differs, it is always best to consult with an experienced estate planning attorney when funding a trust. Nevertheless, it helps to know what is commonly involved in funding a trust, including the following common steps:
- Review Your Assets. The process usually begins with preparing a comprehensive inventory of everything you own. Your attorney will typically review your real estate, financial accounts, business interests, investment portfolios, insurance policies, retirement accounts, and valuable personal property to determine how each asset should be handled.
- Transfer Real Estate. Real estate often represents one of the most valuable assets transferred into a trust. Funding typically requires preparing and recording a new deed transferring ownership from you individually to you as Trustee of your trust. Recording the deed with the appropriate California county recorder helps establish the trust as the legal owner of the property.
- Retitle Financial Accounts. Many bank accounts and brokerage accounts can be retitled in the name of the trust, but each financial institution maintains its own procedures for completing these transfers. You may need to provide a Certification of Trust or other documentation demonstrating the Trustee’s authority.
- Assign Business Interests. Ownership interests in closely held corporations, partnerships, or limited liability companies may also be transferred into a trust. Before making these transfers, it is important to review shareholder agreements, operating agreements, partnership agreements, or buy-sell agreements because some governing documents restrict ownership transfers. Business succession planning should also be coordinated with trust funding to avoid unintended consequences.
- Assign Personal Property. Household furnishings, artwork, jewelry, collectibles, and other tangible personal property may often be transferred through a written assignment document. Although individual titles may not exist for every item, documenting the transfer helps establish trust ownership.
- Review Beneficiary Designations. Funding your trust should also include reviewing beneficiary designations on retirement accounts, life insurance policies, payable-on-death accounts, and transfer-on-death accounts. These assets generally pass according to contractual beneficiary designations rather than the terms of your trust or Will. Outdated beneficiary designations can unintentionally override your overall estate plan.
Creating a trust is an important step toward protecting your family and preserving your legacy, but signing the trust agreement is only the beginning. Properly funding your trust is what transforms it from a well-drafted legal document into an effective estate planning tool.
Do You Have Questions about Funding a Trust in California?
For more information, please join us for an upcoming FREE seminar. If you have additional questions about funding a trust in California, contact the experienced Los Angeles trust attorneys at Schomer Estate & Wealth Advisors by calling (310) 337-7696 to schedule an appointment.
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