Many estate planning attorneys recommend the creation of a trust in addition to a last will and testament. Trusts have several advantages over wills including minimizing estate taxes, planning for a loved one with special needs, allowing creditor protection for beneficiaries, incorporating creative distribution provisions, and more. When used properly, trusts transfer assets from the creator of the trust (the grantor) to their intended beneficiaries outside of probate court.
That is a significant advantage that a trust has over a will; property transferred through a will is subject to the probate process, which can take months, perhaps longer. By contrast, when a trust is used properly, assets placed in the trust are managed and distributed by the trustee without court involvement. When set up properly, the process can be seamless.
Don’t skip over those four words, though: “when set up properly.” Unlike with a will, which is effective as soon as it is executed, a trust must be funded. Failure to do so can lead to stress, confusion and unnecessary cost. It’s important to understand the potential consequences of failing to fund a trust—and how to avoid them for your loved ones’ protection.
The Trust Process, Simplified
Understanding the importance of funding a trust is easier with a brief primer on what a trust is and how it operates. A trust is a legal relationship between three parties: the grantor, the trustee, and the beneficiary. This relationship is created by the trust document. The grantor creates the trust and provides the assets it holds; the trustee manages those assets and makes distributions; the beneficiary receives distributions.
With a revocable living trust, the grantor, trustee, and beneficiary can all be the same person during the grantor’s lifetime. Assets are removed from the grantor’s ownership and placed in the trust’s ownership: funding the trust. Picture that as moving property from a bucket labeled “Grantor” and putting it in a bucket labeled “Trust.” The grantor can still manage, use, and enjoy the property, but they no longer own it: the newly-created trust does.
When the grantor dies or becomes legally incapacitated, a successor trustee (named in the trust document) steps into their shoes to administer the trust for their benefit (if incapacitated) or the benefit of the successor beneficiaries (also named in the trust document) after the grantor’s death..
But the successor trustee only has authority over the property in the Trust bucket. If the trust has not been properly funded—if there is no property in that bucket—the trustee cannot do anything, and the beneficiaries cannot benefit from the trust. The property remains in the Grantor bucket, and must go through probate. In other words, the trust is useless, and the trust document is simply an expensive piece of paper.
Potential Consequences of Failing to Fund a Trust
There are multiple potential negative consequences of the failure to fund a trust. As mentioned, one consequence is the need for the grantor’s assets to go through probate court. If the grantor owned real estate, like a rental or vacation property, outside the state where they resided, it may be necessary to have probate proceedings in two or more states.
Another problem with an unfunded trust (or incompletely funded trust) is the potential for an unintended, inconsistent, distribution of assets. For instance, the trust may have provided for all trust assets to be divided equally among the grantor’s three children. But what if the grantor had an old investment account that named the eldest as beneficiary, and that account was never made property of the trust? The result is that the eldest would inherit that account, plus their third of whatever assets were in the trust. Naturally, that could lead to resentment and even rifts in the family.
If a grantor sets up an asset protection trust to shield assets from creditors or lawsuits, failing to title those assets in the name of the trust deprives them of that protection. The assets remain in the grantor’s name, vulnerable to future lawsuits by their creditors. Similarly, if a grantor creates a trust for the purposes of tax planning or Medicaid planning, failing to fund that trust will frustrate its intended purpose.
Making Sure Your Trust is Funded
In short, the last step in creating a trust is funding it—and reviewing it regularly to ensure that any recently acquired assets are included in the trust. Begin by working with an experienced estate planning attorney who can guide you through the critical process of transferring assets to your trust. You may also want to consider creating a pour-over will, which places assets that remain in your sole name at your death into the trust upon your death. (Be aware that assets disposed of through a pour-over will are still subject to probate).
To learn more about how to fund a trust and the consequences of failing to fully do so, or to get help creating and funding a trust, contact our law firm. The knowledgeable estate planning attorneys at Barron, Rosenberg, Mayoras & Mayoras work with clients who need to create, update, or fund a trust. Schedule a consultation today by calling (248) 213-9514 in Michigan or (941) 222-2199 in Florida to learn how we can assist you. You can also use our simple online contact form.