You’ve made the decision to open a revocable living trust to secure your family’s financial future, but estate planning doesn’t end when you formally sign the trust documents. A trust is only as effective as its funding. In order to maximize the benefit of your trust, assets must be transferred into your trust through a process called funding.
If assets are not transferred into the trust, they will not be managed according to trust terms and may still be subject to probate after the grantor passes away. This is usually the exact scenario that the grantor is trying to avoid.
Therefore, transferring assets into the trust is the essential second step of creating a trust. As the initial trustee, you will generally continue to manage and control your assets according to the terms of the trust. However, that doesn’t mean that all assets can or should all be placed directly in the trust.
How you fund a revocable living trust matters. Today we’ll look at some of the key estate planning opportunities that families will need to consider when funding a revocable trust.
What Does Funding a Revocable Living Trust Actually Mean?
A revocable living trust is a type of estate planning tool that is created during the grantor’s (the person who created the trust) own lifetime. It is called revocable because the grantor generally has the ability to amend or revoke the trust during their lifetime, including making changes to the assets held by the trust.
Funding is the process of transferring ownership of assets, such as a home, into the possession of a trust. Once transferred, the asset will technically be governed by the trust, but as the initial trustee, you still have the ability to do whatever you want with the trust assets. However, the process of funding the trust does not happen automatically.
Every specific asset that you want to be held and managed by the trust, every account, policy, or business interest, must legally be transferred to the trust.
For an asset like a home or other property, this might be transferring the deed. Bank accounts like checking and savings accounts may be retitled to the trust.
Other accounts, like a life insurance policy or retirement account, may not actually need to be transferred to the trust. These accounts typically have a beneficiary listing, which is often the surviving spouse or a child. Many choose to name the trust as a contingent beneficiary.
Almost every type of asset has its own procedure for funding a revocable trust.
When your assets are not titled, transferred, assigned, or otherwise coordinated into the trust, they remain outside of the trust’s control when the trust grantor passes away. Depending on the asset type and how it is structured, those assets may need to pass through probate or may transfer through another method, such as beneficiary designation or pay-on-death designation (POD).
Does Funding a Revocable Trust Mean You’re Giving Up Control of Your Assets?
This is one of the most common misconceptions people have when discussing their trust. Generally speaking, no, by funding a trust, you are not giving up control over your assets.
That is because as the trust’s grantor, you are also the initial trustee. Until you pass, you are the one responsible for managing the trust assets. Unless you name someone else as the initial trustee (which some people choose to do for their own reasons), you retain full control over the assets placed into the trust. Most grantors also name themselves as the primary beneficiary of the trust during their lifetime. That generally allows you to continue managing and controlling assets during your lifetime, the same as you did before the trust.
The benefit of a revocable living trust is that you generally still have the flexibility to buy and sell assets held in the trust, make changes to the trust, change beneficiaries, remove or replace successor trustees, and even revoke the trust entirely. “Revocable” might as well be another word for “flexible”.
To share a practical example, if someone places their San Mateo home into a living trust, they are not handing ownership or control over the home to someone else. They are simply changing the legal ownership structure to themselves, as trustees of their trust, so they can receive the benefits of the trust while they maintain control of the home.
Why Funding a Living Trust Matters
Most families that choose to create and fund a living revocable trust do so because they want to avoid probate.
What is probate? It’s the court-supervised legal process of passing down a person’s assets to their heirs or beneficiaries.
The problem with probate, and the reason why many families wish to avoid it, is that it is a public, time-consuming process. Properly funded revocable living trusts can generally help assets held by the trust avoid probate.
When a person passes away with a will rather than a trust, the will is validated by the probate court. The person’s outstanding debts and taxes are paid first from their estate’s funds, and then anything left over can be distributed according to the terms of the will. This entire process is also a matter of public record.
By creating and funding a revocable living trust, any assets that you place inside the trust bypass probate.
For many families, the difference is significant. Probate processes can take anywhere from six months to a year or longer, depending on the amount of assets in the estate. That means beneficiaries may not receive their inheritance for a long period of time. In contrast, a trust does not require court oversight, meaning inheritances can generally be administered more quickly, depending on the size and complexity of the trust.
Unlike probate, the trust administration process is also generally private. Trust assets and beneficiary information are not typically disclosed through the public court process, which can be extremely beneficial to the privacy of your heirs.
How to Fund a Revocable Living Trust
Once you’ve signed the trust documents, the next step is deciding how to fund a revocable living trust. Most people assume that funding a trust is a one time transaction, but in reality, it is a constantly evolving process. You may initially fund the trust with certain assets, and over time continue to fund it with new holdings.
This is where it can be beneficial to work with an experienced trust and estate planning attorney. Different assets have different processes for funding a revocable trust. An attorney can help you decide which assets to place into the trust, and how to connect each specific one.
Real Estate
In San Mateo, where property values are high, this is one of the most common, and most important assets people use to fund a living trust.
Funding a trust with real estate involves changing how title to the property is held. This typically involves preparing and signing a new deed, which is then filed with the appropriate county office.
After transferring the deed, the property is held by the trustee of the trust, who becomes responsible for managing the property. Because the initial trustee is often the grantor, they can generally continue living in the property, as well as sell or refinance it as permitted by the trust agreement.
Having an attorney advise you on how to fund a living trust can help you consider the existing loans, ownership structure, and community property considerations to ensure that funding the trust with real estate is in the best interests of your family.
Bank Accounts
Checking, savings, and other bank accounts are also commonly used to fund a revocable trust. Depending on the specific financial institution, this can involve changing the ownership of the account from an individual to the trust, or opening up new trust accounts.
Some individuals choose to transfer only specific bank accounts to the trust, leaving smaller accounts outside of it. The goal is generally to ensure that those accounts with significant assets can be managed according to trust terms, rather than requiring court intervention after the grantor’s death if left out of the trust.
Investment Accounts
Unlike most bank accounts, investment accounts often have their own procedures for transferring ownership.
Brokerage accounts, stock portfolios, mutual funds and other investment assets may require the opening of a new account in the name of the trust.
Retirement accounts, such as 401(k)s and IRAs, are generally handled through beneficiary designations, rather than retitling ownership. Depending on the estate plan, beneficiaries often include a spouse, children, or in some cases a trust. Changing ownership can potentially trigger tax consequences, which most families typically want to avoid.
Business Interests
Ownership in a business is one asset that can be overlooked when funding a revocable living trust. If someone owns an LLC, is party to a partnership, owns a family business, or has shares in a privately held corporation, these interests should be reviewed by an attorney before adding them to the trust.
The ideal process can be dependent on the actual business structure, and may require updating company records, or reviewing operating and shareholder agreements before assigning ownership interests to the trust.
Personal Property and Other Assets
Personal property such as vehicles, furniture, jewelry, artwork, collectibles, and family heirlooms are often different from real estate or financial accounts. Trusts may list these items and include details for their distribution assignment, however vehicles may require separate ownership documentation depending on state requirements and the terms of the estate plan.
Digital Assets
Cryptocurrencies, online businesses, accounts, digital files, and intellectual property are increasingly becoming a part of estate planning. Addressing digital assets in a living trust can be tricky, because these items often require reviewing ownership records, account agreements, access and transferability rules.
Beneficiary Designations
Some assets cannot be transferred into a trust by changing ownership. Life insurance policies and retirement accounts are good examples of assets that use beneficiary designations to control their payouts. In some cases it may be preferred to leave a surviving spouse or children as the direct beneficiaries, rather than the trust. For specific guidance, it’s best to consult an estate planning attorney.
How an Estate Planning Attorney Can Help
Funding a living trust isn’t a one-time task. As your life circumstances change over time,you may need to add new assets, remove others, and ensure that the trust still serves your estate planning goals. An estate planning attorney can help in this area.
Whether you’ve purchased a new home, started a business, or welcomed a new grandchild, an attorney can review your trust funding and help you identify assets that may have been overlooked, or acquired after the trust was created.
They can also help you understand which assets should be retitled in the name of the trust, and whether beneficiary designations should be updated. Because different types of assets have different transfer requirements, an attorney will give you the professional guidance to make the right decisions.
The Law Office of Vidhya Babu Can Help You Fund Your Living Trust in San Mateo
Creating a revocable living trust is only the first step in achieving your estate planning goals. For your trust to provide the maximum benefit, it needs to be properly funded with assets and in a way that serves your family’s interests.
For individuals considering creating a living trust in San Mateo, the Law Office of Vidhya Babu can help.
Our team has the experience in San Mateo and Bay Area estate planning to help you understand your options in estate planning, including establishing revocable living trusts, and how to fund them in ways that benefit your family most.