Creating a trust is a critical part of estate planning, but a trust is only effective if it’s properly funded. Without the right funding, even the most meticulously drafted trust can fail to achieve its intended purpose, leaving clients vulnerable to probate and other issues they specifically sought to avoid. In this guide, we’ll explain what it means to fund a trust, why funding a trust is so important, and key considerations for funding different types of assets.
What does it mean to fund a trust?
“Funding a trust” involves transferring ownership of your assets from yourself as an individual into your trust. Once the assets are owned by the trust, the trust controls those assets, based on the rules you’ve established in the trust document.
It’s important to note that creating a trust and funding a trust are two separate steps. Creating a trust happens when your client is setting up their estate plan. But funding the trust is the crucial next action—and one where you, as their financial advisor, can add immense value. Even if an attorney created the trust, they may not be deeply involved in the actual funding process.
Funding a trust typically involves:
- Retitling assets like real estate and vehicles to be owned by the trust
- Updating beneficiary designations on accounts like life insurance and retirement plans to name the trust
- Assigning personal property like jewelry, art, and furniture to the trust according to a schedule
Why funding a trust matters
A trust only controls the assets it owns. An unfunded trust—sometimes called an “empty” trust—provides little to no benefits and may even defeat the purpose of creating it in the first place. Some key reasons to fund your trust include:
- Avoiding probate: One of the main reasons to establish a revocable living trust is to avoid probate, which can be time-consuming, expensive, and public. But only assets titled in the name of the trust (or those passing via another method, such as beneficiary designation) bypass probate.
- Protecting your assets: Trusts can provide protection against creditors, lawsuits, divorce, or mismanagement by beneficiaries. Plus, unlike wills, which become public documents during probate, trusts generally maintain privacy. However, this privacy and protection advantage only extends to assets properly placed in the trust. Assets that pass through probate may become part of the public record.
- Maintaining control: With a trust, you can specify exactly how and when your assets should be distributed to your beneficiaries. But the trust can only control the assets you’ve placed into it.
- Planning for incapacity: If you become incapacitated, your trustee can typically seamlessly step in to manage the trust assets on your behalf — but only for assets that were properly funded into the trust.
What to know about funding a revocable trust
It’s important for clients to understand that funding a revocable trust does not remove the assets from their taxable estate—unlike many irrevocable trusts which do often remove assets from the taxable estate. Your clients typically still maintain control over the assets placed in the revocable trust and can amend or revoke the trust at any time.
Some clients may worry that transferring assets to a revocable trust means giving up ownership of those assets. Reassure them that this is not typically the case—they will likely maintain full control, but the trust now holds legal title.
Not all assets should be placed in a revocable trust. Assets that already have named beneficiaries, like retirement accounts and life insurance policies, can often be left out of a trust without being subject to probate. Of course, it’s always smart to consult an estate planning attorney to determine if a particular asset should be moved into the trust. Wealth.com’s Attorney Network can be a valuable resource for these decisions.
When to fund a trust
Most assets can and should be transferred into the trust as soon as possible after the client creates it. Funding the trust promptly ensures the assets are protected in the event something happens to the client. It may also be easier for clients to follow through on funding sooner rather than later.
This approach immediately provides probate avoidance benefits and allows for simpler management if the individual were to become incapacitated. Funding during the grantor’s lifetime also gives them time to address any complications that arise and offers a chance to refine any funding strategies.
Some assets cannot or should not be placed in a revocable trust during life but can be directed to the trust at death through a “pour-over” will that catches any unfunded assets, beneficiary designations that name the trust or TOD/POD designations to the trust.
For certain assets like IRAs and 401(k)s, the tax implications of transferring to a trust during life may outweigh the benefits. These assets typically remain outside the trust during the grantor’s life but may name the trust as a beneficiary upon death, depending on the specific situation.
How to fund a trust: by asset type
Different asset types require different approaches to funding. Let’s examine the most common assets and how to effectively transfer them into a trust.
Real estate
Real estate is often among a client’s most valuable assets, making proper transfer into their trust particularly important.
How to fund:
- Create and record a new deed transferring the property to the trust
- Update title insurance policies
- Notify homeowner’s insurance companies of the change in title
- For properties with mortgages, check for due-on-sale clauses (though most residential mortgages exempt transfers to revocable trusts)
While transferring real estate to a trust doesn’t typically impact your mortgage or insurance, it’s smart to check with your attorney and providers to confirm. For out-of-state properties, you may want to work with a local attorney familiar with that state’s requirements. When transferring real estate to a trust, always make sure that property tax exemptions won’t be affected.
Bank accounts and brokerage accounts
Financial accounts are typically simple to transfer to a trust but require the right documentation.
How to fund:
- Complete the financial institution’s account retitling forms
- Provide the Certification of Trust or similar document
- Update direct deposits and automatic payments as needed
Keep in mind that some institutions may require a new account number. For joint accounts, the couple should decide whether to maintain joint ownership or separate into individual trust accounts. You’ll also want to pay attention to FDIC insurance limits, as trust ownership can sometimes increase coverage. The current FDIC limit is $250,000 per person, per account, per ownership category.
Personal property
Tangible personal property includes furniture, jewelry, art, collectibles, and other household items.
How to fund:
- Execute an assignment of personal property to the trust
- For high-value items with titles (boats, cars), retitle into the trust name
- Create an inventory of items for the trust records
Keep in mind that vehicles may be difficult to transfer in some states due to registration issues. You’ll also want to make sure you’re updating insurance policies for items transferred to the trust. For valuable collections or artwork, consider getting an appraisal before transferring to the trust. This establishes a baseline value and can help with later tax decisions.
Business interests
Transferring business interests requires extra consideration of any tax implications, operating agreements, and succession planning.
How to fund:
- For sole proprietorships, execute an assignment to the trust
- For partnerships, LLCs, or corporations, transfer ownership interests according to the entity’s governing documents
- Update stock certificates, membership certificates, or partnership records
Before transferring any business interest to a trust, review the operating agreement or bylaws with the client’s attorney to make sure the transfer won’t trigger unintended consequences or buyout provisions.
Retirement accounts
Retirement accounts like IRAs and 401(k)s present an extra challenge due to their tax treatment.
How to fund:
- Generally, retirement accounts should NOT be transferred to a trust during the owner’s lifetime, as this can trigger immediate taxation
- Instead, consider naming the trust as a beneficiary
Keep in mind that the SECURE Act has significantly changed the rules for inherited retirement accounts. Trust provisions must be carefully drafted to optimize tax treatment for trust beneficiaries. For married couples, spousal rollovers often provide better tax treatment than having the account flow through a trust.
When naming a trust as a beneficiary of retirement accounts, there are various considerations to take into account that could affect the administrative burden and tax liabilities that could result. For example, one consideration is making sure the trust includes a ‘see-through’ provision that allows for required minimum distributions to be calculated based on the beneficiaries’ life expectancies.
Life insurance and annuities
Life insurance and annuities pass by beneficiary designation and typically remain outside the trust during the owner’s lifetime.
How to fund:
- Consider naming the trust as beneficiary rather than transferring ownership
- For specific estate planning needs, a specialized irrevocable life insurance trust (ILIT) may be more appropriate
Keep in mind that changing ownership of policies may have gift tax implications, and that some annuities may have surrender charges if ownership is transferred. Make sure you review life insurance beneficiary designations regularly, as many clients inadvertently nullify trust planning by naming individuals directly rather than their trust.
What if a couple has individual trusts?
For married couples who have decided to create individual trusts rather than a joint trust, they’ll need to decide how to divide their assets between the two trusts.
There may be strategic considerations when dividing assets — like if one spouse is more susceptible to litigation or creditor issues (like a business owner) or if one is more likely to need long-term care (and may want to plan for Medicaid eligibility).
Here are a few additional tips:
- Community property may need to be converted to separate property before being funded into individual trusts
- The division of assets should align with each spouse’s estate planning goals
- Make sure beneficiary designations on non-trust assets align with the overall estate plan
How financial advisors can help with trust funding
While an attorney may have been involved in the drafting of the trust documents, they may not provide the full guidance on funding. Many clients are left with the impression that their estate plan is complete after signing the trust, not realizing that funding is a separate and crucial step. Financial advisors can help by:
- Creating an inventory of assets. Help clients identify all assets that should be considered for trust funding.
- Developing a funding strategy. Work with the client’s attorney to determine which assets should be transferred to the trust and which should use beneficiary designations.
- Assisting with financial account transfers. Guide clients through the process of retitling bank and investment accounts.
- Monitoring funding progress. Create a tracking system to ensure all intended assets are properly transferred.
- Conducting periodic reviews. As clients acquire new assets or experience life changes, review and update the funding plan accordingly.
If questions arise, you can always help the client consult an attorney, such as one through Wealth.com’s national Attorney Network.
Conclusion
Trust funding is an essential part of estate planning, yet it remains one of the most frequently overlooked aspects. By understanding the processes of trust funding, advisors can provide more robust assistance to their clients, helping them avoid costly mistakes and make sure their estate plans work as intended.
Remember that trust funding is not a one-time event, but an ongoing process that requires regular monitoring. By incorporating trust funding reviews into your service model, you can strengthen client relationships and deliver more holistic financial guidance.
