Funding is Critical to Estate Planning, 06-30-2010

Everyone knows that planning is part of estate planning. When Ted and Emily met with their attorney, they discussed their family’s needs and the legacy they wanted to leave. Ted and Emily and the attorney created an estate plan designed to achieve their goals via a Revocable Living Trust as the way to get there. After the documents were prepared, they set up the appointment to sign or “execute” the Trust and other documents, including the Property Power of Attorney, the Health Care Power of Attorney, and a Pour Over Will. After that, they were done, right?

That’s what Ted and Emily thought. But, when Ted died, Emily found out how wrong they were. A Trust only controls the assets titled into it, otherwise known as “funding the Trust.” When Ted passed away, it was discovered that the Trust was still unfunded. This meant some assets were held in joint tenancy and passed to the surviving joint tenant, Emily. While other assets passed by beneficiary designation. Ted had still more assets in his own name. Those assets had to go throughprobate, the public and sometimes difficult process by which title is passed from a person who has died, through intestacy if there is no Will, or, in Ted’s case via his Pour Over Will to the Trust.

Funding is the process of transferring title of assets into your Trust. Emily learned that planning is not enough; funding is also critical to an estate plan. An unfunded trust is the equivalent of a treasure chest without any gold in it. As part of your estate plan, a good estate planning attorney will instruct you on what and how assets get transferred into your Trust, or may include funding in the fee. Ownership of most assets should be transferred into your Trust. Exceptions are:

Retirement accounts, such as IRAs, 401(k)s, 403(b)s, etc. Doing so would have negative income tax consequences. In some circumstances you may want to change the beneficiary designation of these accounts to your Trust.

Custodial accounts, such as UTMA and UGMA accounts.

Life insurance. However, sometimes it is advisable to put this in a special irrevocable Trust in order to reduce estate taxes.

Motor vehicles. Depending on the state, it may be better to leave these outside the Trust.

Checking account. Sometimes people want to leave a small amount in a checking account for day-to-day transactions, especially if they want to protect their privacy and not disclose the existence of the Trust.

Most lenders require you to remove your home from your Trust before refinancing. If this becomes necessary, your estate planning attorney can prepare a deed from your Trust to you as an individual. Sometimes this is necessary if the lender plans to bundle and sell your loan. If you remove the home from the Trust, remember you can and should put it back in the Trust immediately after the loan closes. Failure to do so may unnecessarily add probate expenses or may even disrupt the plan you so carefully put together.

As with most things, it’s important to see things through to the finish. In Estate Planning, that means making sure your Trust is properly funded. Planning and funding are both necessary for your estate plan to achieve your goals. Please contact MH if you need help funding your Trust or would like to schedule an appointment.