Understanding what it means to fund a trust helps ensure the plan you created actually works when it matters most. When you properly place your assets, such as property, bank accounts, and investments, into the trust, your successor trustee can manage them smoothly, and your estate plan can function the way you intended.
What Is Funding a Trust?
A simple way to understand funding a trust is to think of it as a bucket. Drafting and executing the trust document builds the bucket. Funding the trust means placing your assets into that bucket so the trust actually holds and controls them.
For many people, the most important assets to move into the trust are their home and primary bank accounts. Ensuring those assets are titled in the trust’s name is often one of the first steps in funding it. However, that is only the beginning. Many other assets may also need to be transferred or coordinated with your trust to ensure your estate plan works the way you intended.
Assets to Put into Trust
To ensure your trust works as intended, you must transfer certain assets into the trust during the funding process.
Common assets placed into a trust include the following:
- Real property: Personal residences, vacation homes, rental properties, and mineral interests.
- Bank accounts: Checking accounts, savings accounts, and money market accounts.
- Investment and brokerage accounts: Non-qualified investment accounts and brokerage portfolios.
- Business interests: Shares in a corporation, partnership interests, or membership units in an LLC.
- Personal property assignments: Certain valuable belongings or collections that you want managed or distributed through the trust.
- Life insurance: Policies are usually not retitled into the trust. Instead, the trust may be listed as a beneficiary so proceeds can flow into the trust when appropriate.
Assets Not to Put into Trust
While many assets can be transferred into a trust, some are better handled through other ownership structures rather than being retitled in the trust’s name.
Assets typically not placed directly into a trust include the following:
- Qualified retirement accounts: Accounts such as 401(k) plans, IRAs, and other pre-tax retirement plans are usually not transferred into a trust because changing the owner could create a taxable event.
- Certain benefit accounts: Some other employer-sponsored plans or specialized financial accounts must remain in the individual’s name due to plan rules or tax considerations.
- Children’s bank accounts: Accounts created for a child, whether through joint ownership or a co-signer arrangement, are generally left outside the trust because they belong to the child.
If you want to designate a charity as a beneficiary within your overall estate plan, it is best to do that within your qualified retirement accounts from a tax perspective.
Why Funding a Trust Is Important
Drafting and executing the trust document builds the bucket, but the plan only works if you place your assets into it. If property, accounts, or other assets remain in your personal name, they may not be controlled by the trust when the time comes to administer your estate.
In many cases, assets that are not transferred into the trust become probate assets. Probate can be a lengthy court process that delays distributions and creates additional legal costs for your family. Properly funding a trust helps ensure your assets can be managed and transferred according to your plan without unnecessary court involvement.
Some attorney is going to say to you, ‘Alright, I’ll do the trust for you, but the rest of it is on your own.’ That’s not really much of a service. What you’re really buying is an expensive piece of paper that isn’t going to apply.
How to Confirm Your Trust Is Properly Funded
Because life circumstances change over time, it is a good idea to periodically review your assets and confirm that they are properly titled in the name of the trust or coordinated with your estate plan.
You can check the following records to help determine whether you have properly funded the trust:
- Real estate: Check the deed and ensure it has been properly recorded. Visit the county assessor or recorder website to see how the property is titled. If your trust controls the property, the trust name should appear as the owner rather than your own name.
- Bank and financial accounts: Review bank or brokerage statements. Accounts held by the trust will typically list the trust name or show that the trustee is acting on behalf of the trust.
- Business interests: Review operating agreements, stock certificates, or ownership records to confirm whether the trust holds the ownership interest.
- Life insurance policies: Review your beneficiary designation forms to confirm whether the trust is listed as a beneficiary when appropriate.
What Happens to Personal Belongings in a Trust?
Many people ask what should happen to personal belongings such as vehicles, boats, jewelry, watches, or family heirlooms. While these items may not have the same financial value as real estate or investments, they are often the most meaningful.
Many estate plans address these items through an Assignment of Personal Property, which transfers personal belongings into the trust so the successor trustee can distribute them in accordance with the plan.
You may also use a Personal Property Memorandum, a separate document that lists specific items and their intended recipients. This document can often be updated without changing the trust.
These personal touches can be an important part of the planning process. Many families care deeply about who receives meaningful items such as heirlooms, collections, or sentimental belongings.
Common Mistakes When Funding a Trust
Even when a trust is properly established, funding mistakes can still occur. One of the most common issues is treating funding as a one-time task completed upon execution of the trust document.
In reality, funding a trust is an ongoing process, and you have to keep checking the bucket. Over time, people buy new homes, open bank accounts, start businesses, or refinance property. When those changes occur, it is easy for assets to be left outside the trust if titles and beneficiary designations are not updated.
These situations often lead to the following mistakes:
- Forgetting to retitle real estate: A home may be transferred into the trust initially, but after refinancing or purchasing a new property, the deed has not been updated to return the property to the trust.
- Leaving new business interests outside the trust: LLC memberships, partnership interests, or corporate shares are sometimes issued in an individual’s name rather than in the trust.
- Failing to coordinate life insurance policies: A new policy may be purchased without updating the beneficiary designation to align with the estate plan.
- Adding children as joint owners on accounts or property: This can unintentionally give them ownership rights and may create tax or legal complications.
Consequences of Not Funding a Trust
If assets are not properly transferred into a trust or coordinated with your estate plan, several complications can occur.
Common consequences of funding issues include the following:
- Probate proceedings: Assets left outside the trust may be subject to probate.
- Unnecessary legal fees: Probate and court involvement can increase administrative costs.
- Unintended beneficiaries: Assets may pass according to default laws or outdated designations.
- Early access to inheritance: Beneficiaries may receive assets sooner than planned.
- Exposure to legal disputes: Assets may become involved in creditor claims, disputes, or divorce proceedings.
- Potential tax consequences: Certain assets may trigger additional tax complications depending on how they are transferred or distributed.
Frequently Asked Questions
Understanding how to fund a trust often raises a few common questions. Here are brief answers to some of the questions we hear most often.
Should You Put a 401(k) in a Trust?
No, you generally should not place a 401(k) or IRA into a trust because transferring ownership of a pre-tax retirement account can trigger a taxable event. However, a trust may sometimes be listed as a contingent beneficiary depending on the estate plan and tax considerations.
Is Life Insurance Taxable to Beneficiaries If It Goes Through a Trust First?
In most cases, life insurance proceeds are not taxable income to beneficiaries, even if the policy pays into a trust before distribution.
Do We Recommend a Revocable or Irrevocable Trust?
Whether you need a revocable or irrevocable trust depends on your situation. Most estate plans begin with a revocable trust, while some families may benefit from the specialized planning an irrevocable trust can provide.
What Our Attorneys Say About Funding a Trust
At Evans & Davis, our estate planning attorneys regularly help clients review their assets and ensure their trusts are properly funded.
Here is some guidance our attorneys often share about funding a trust:
Your trust should be properly funded during your lifetime. Leaving property outside of a trust may cause a probate.
Ensure that your trust is fully funded with all of your assets so the plan you’ve designed actually controls the assets you intend to pass through it.
Make sure that every single asset (less qualified accounts and other minor exceptions) is funding into the trust or has appropriate beneficiary designations.
Ensure new assets get funded in the Trust
At Evans & Davis, our estate planning attorneys help clients identify which assets should be transferred, confirm that titles and beneficiary designations are correct, and ensure new assets continue to flow into the trust over time. With the right guidance, you can feel confident that your trust is fully funded and your estate plan protects your family.
Call 866-708-2335 or contact us online to speak with an Evans & Davis estate planning attorney about properly funding your trust.
