What Does It Mean to Fund a Trust?

Elderly couple reviewing legal documents

Imagine that you had a safe built for your home to protect your most cherished possessions. It’s sturdy, spacious, waterproof and fireproof, with a secure lock that can only be opened by authorized persons. In short, it’s designed and built to completely protect what matters to you. It would be madness to leave your treasures outside the safe and assume that it will still protect them. Yet that’s exactly what happens when people forget about funding a trust.

Just as a safe physically contains property, a trust is a legal container for property. In order to get the legal protections a trust provides, you need to put those assets in a trust—otherwise known as funding the trust. While the process is not quite as easy and obvious as that of putting items in a physical safe, it is just as important to achieving the protection that you want from your estate planning.

Funding a Trust: the Basics

A last will and testament, which goes through the probate court, does not require any funding because it is administered through the court system. In contrast, when properly funded, a trust avoids the court system and is administered privately. BUT you have to transfer your assets into the trust. This is one of the many reasons that do-it-yourself estate planning is so risky; websites and form books provide little to no guidance about how to fund a trust properly.

Even if you have a trust prepared by a skilled attorney, it is utterly worthless for your purposes unless it is funded. And the funding is something that requires guidance from your attorney or you could still end up in court and/or have unwanted tax consequences on some assets.

Some people are so relieved at having finally created an estate plan that they forget about funding a trust; others may not have had the importance of funding a trust conveyed to them by their attorney and mistakenly believe that there is nothing further they need to do. Funding your trust is not difficult, but different types of assets may need to be placed in the trust in different ways. It’s important to understand the steps needed to place a particular asset in a trust, and consult with your attorney throughout.

How to Fund a Trust

Nearly any kind of asset can be used to fund a trust, including real estate, financial accounts, stocks and bonds, art, intellectual property like patents, and personal property like art, jewelry, and collectibles. Here are some assets with which trusts are commonly funded, and some information on placing them in a trust.

Bank Accounts

Funding a trust with a bank account is relatively simple. If you own a bank account in your own name or jointly with someone else, you simply take the trust document (or we suggest the certificate of trust to keep your trust private) to the bank and complete documents to transfer ownership of the account to the trust. All account owners must agree to the transfer.

Investment Accounts

Investments like stocks and bonds, brokerage accounts, and money market accounts can be used to fund a trust much like bank accounts, using forms provided by the institution to transfer ownership. However, retirement accounts like IRAs and 401(k)s are different, as we will discuss below.

Retirement Accounts

Because a trust is a separate legal entity, transferring ownership of a retirement account like an IRA or 401(k) to a trust during your life could count as an early withdrawal, subjecting you to severe penalties and taxes. Instead, your attorney may advise you to use forms available from your plan administrator to make your trust the beneficiary or alternate beneficiary of your retirement account upon your death. This is not one-size-fits-all, and your attorney should advise you based on your distribution language and the additional provisions in your trust on how to designate beneficiaries in your particular case.

Real Estate

You can have unwanted Medicaid consequences and in some cases lose creditor protection by transferring your real estate into your trust. It is critical that you consult with your attorney on this. Oftentimes, we recommend using a ladybird deed as opposed to a quitclaim deed. Once again, this is not one-size-fits-all, but requires advice from your attorney on what is best for you. Also, be aware of insurance issues that may arise if you transfer your real estate directly into your trust.

Life Insurance

A trust is often named as the beneficiary on life insurance policies. Once again, this depends on your individual circumstances and your distribution wishes. Therefore, you should discuss the proper funding with your attorney.

Get Help Funding a Trust

To reiterate, it is critical that funding is done when you have a trust AND that you follow the specific advice of your estate planning attorney on how to fund your trust. The proper funding takes into account tax consequences, distribution wishes, and more. To make sure your trust is properly funded, get the guidance of an experienced trust attorney. 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.