A trust is a common estate planning tool that can be used to manage assets and provide for beneficiaries after the Grantor’s (trust creator) passing. Simply establishing a trust, however, is not enough to ensure its effectiveness. Properly funding the trust is also essential for it to serve its intended purpose. With that in mind, the Los Angeles attorneys at Schomer Estate & Wealth Advisors discuss how funding a trust works.
What Are Some Common Reasons to Establish a Trust?
After a Last Will and Testament, a trust agreement is among the most common additions to an estate plan, due in large part to the numerous and varied benefits a trust can provide, such as:
- Ensuring Asset Management: Assets held in a trust are intended to benefit the named beneficiary or beneficiaries. A trust allows the Trustee, appointed by the Grantor (the creator of the trust) to manage those assets according to the terms outlined in the trust document. This ensures that assets are preserved, invested, and distributed in accordance with the Grantor’s wishes.
- Avoiding Probate: Assets held in a trust typically avoid probate, the legal process of administering an estate. Probate can be time-consuming, expensive, and subject to public scrutiny. By using a trust to pass down estate assets they can pass directly to beneficiaries, bypassing probate proceedings.
- Maintaining Privacy: A Will must be submitted to the appropriate court during the probate of an estate. That means that the terms of that Will, including gifts made in the Will, become a matter of public record. Conversely, a trust agreement remains private and is not part of the probate process. As such, the terms of a trust agreement, including how assets are distributed from the trust, are not made public.
- Facilitating Incapacity Planning: A trust can also play a role in incapacity planning. The Grantor is also appointed to be the Trustee of the trust, allowing him/her to continue to control assets transferred into the trust unless he/she becomes incapacitated. If that happens, the person named by the Grantor to be the successor Trustee automatically ascends to the role of Trustee, ensuring that assets continue to be managed by someone of the Grantor’s choosing.
What is Trust Funding?
Trust funding refers to the process of transferring assets into a trust. A trust is established by creating a legal document known as a trust agreement.” When a trust is created, it exists as a legal entity separate from the Grantor; however, for the trust to function, it must hold assets. These assets can include real estate, investments, bank accounts, business interests, and personal property. Without assets, the trust is empty and serves no purpose. In the case of a living trust, assets are typically transferred from the Grantor into a trust. The specific steps may vary depending on the type of asset and the jurisdiction, but generally include the following:
- Identifying Assets: The first step is to identify which assets should be transferred into the trust. This may include real property, financial accounts, investments, business interests, and personal property.
- Changing Title or Ownership: For assets such as real estate, vehicles, and bank accounts, the title or ownership must be changed to reflect the trust as the new owner. This often involves executing deeds, titles, or account documentation naming the trust as the owner.
- Re-registering Assets: For investment accounts, stocks, bonds, and other financial assets, the ownership must be re-registered in the name of the trust. This typically involves working with financial institutions to update account registrations.
- Assigning Beneficiary Designations: Certain assets, such as retirement accounts and life insurance policies, pass directly to designated beneficiaries upon the owner’s death. To ensure these assets are included in the trust, the trust may be named as the primary or contingent beneficiary.
- Updating Legal Documents: Finally, it’s important to review and update any legal documents, such as wills or powers of attorney, to ensure they are consistent with the trust and its funding arrangements.
What Assets Can Be Used to Fund a Trust?
Assets eligible for funding a trust can vary depending on the type of trust and the specific provisions outlined in the trust document; however, in most cases a trust can be funded using almost any kind of assets except health savings accounts, medical savings accounts, and retirement accounts (such as 401(k)s, IRAs, and pension plans). There are other types of assets, such as personal and business checking accounts, that legally can be used to fund a trust but that usually should not be used because it makes it impractical to access the funds held in the account. It is essential to work closely with both your estate planning attorney and your financial advisor to determine the most appropriate assets to fund a trust based on individual circumstances, goals, and applicable laws and regulations.
Do You Need Help Funding a Trust?
For more information, please join us for an upcoming FREE seminar. If you need help funding a trust, contact the experienced Los Angeles estate planning attorneys at Schomer Estate & Wealth Advisors by calling (310) 337-7696 to schedule an appointment.
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