Funding Puts the Fun-(ction) in Your Trust

Written by RG Skadberg
Attorney and Co-Founder of CCSK Law

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Funding.

I have always struggled with the use of the term "funding" as it pertains to trust planning. In reality, a more appropriate term would be transferring, but the law defines the process as funding. 

For formality, "funding" is the word we use to describe the process of moving an asset from your name (i.e., ownership) to the name of your trust.  

There are two reasons we fund our trust: 

• First, it allows your assets to be managed by the plan that you outlined in your trust.
• Second, it can avoid having assets in your name after your death to eliminate the expense and time of Probate to administer your estate.

I explain the reason and process to my clients this way:

"We create a funding plan to make sure we know the disposition or transfer of current and future assets. It is important to know what goes into your trust, when it goes in your trust, and what things will not ever go in your trust."

There may be some assets we move into the trust immediately. There may be assets that transfer in the future by way of beneficiaries, transfers on death, or payable on death provisions. In addition, there may be some assets that transfer to persons or entities without trust involvement. 

It is very important to understand that merely creating a trust and noting that you intend to move your assets to the trust are not enough to complete the funding process. Unfortunately, this happens more often than it should. Merely noting an intention to transfer without actual transfer often results in the Probate of some assets. This adds time and expense to an estate's distribution process because a court needs to be involved. The court has specific timelines and requirements which must be followed to complete the process. In most trust-based estate plans, the attorney will include (dare I say "should include") a Last Will with a Pour-Over provision. This gives instructions to the court, including the Probate assets "pour-over" to the Trust at the conclusion of Probate.  

The unfortunate part of going through Probate is that it potentially adds thousands of dollars and six months to a year to the process. A properly designed and executed funding plan should eliminate this from happening.

So, what goes into a funding plan?

First, complete an evaluation of all of your assets. Take some time to think about more than the obvious real estate, current bank accounts, and vehicles. Think about insurance policies and retirement plans that may have been acquired at different times of your life through different jobs. Maybe you have an old bank account or two that you no longer use, but which have some value. Savings bonds, stock certificates, or an old stock account from your old "day-trader" efforts are easily missed. 

Make a list of these assets and how they are currently owned. It is important to understand if they are in your name, held jointly with a spouse or someone else, if you hold a specific percent interest, or maybe you are a beneficiary or an heir of property that has yet to be transferred.  

Next, determine what should be moved now. While ten or so years ago, it was easy for an attorney to tell a client to "move everything into your trust," the process is more complicated now. A Quit Claim Deed, a new signature card at your bank, and a call to your financial advisor to tell her to move everything to the Trustee of Your Family Trust may have worked then. However, in today's world, it isn't that easy.  

There are considerations to decide if or how to move your bank account in your trust. Also, today, to change the ownership of your bank account, many banks require you to close your current account and open a new one in the trust. That may cancel your auto-payments and auto-deposits. It makes your current checks and debit cards useless, too. There are options to consider the transfer of your bank accounts to your trust. Options may be based on the amount you keep in your bank account and ways to transfer ownership at your death. 

A Quit Claim Deed that transfers your home with a mortgage secured to it might cause your mortgage company to start asking questions about your trust. If you refinance your house that is in trust, most mortgage companies require a property to be "Quit Claimed" out of the trust for underwriting. The mortgage and new deed are issued at closing in your name. Rarely, does anyone remind you to re-deed the property back to the trust. There are advantages and disadvantages to consider. Either way, make sure you have a plan for the property to move to the trust in some way.

The various "investments" you own, and the funding plan vary substantially. It is important to talk to your advisor about the types of assets you own, such as stocks, bond, mutual funds, other investment funds, annuities, IRAs, and retirement plans, such as 401s, 403s, SEPs, etc. Each of these assets have different rules about how they fund or don't fund into the trust. Your advisor knows your big-picture plan and can make suggestions accordingly.  

Vehicles, tangible personal property (i.e. items around your house), and other items need to be accounted for, considering the options for each, making a plan, and executing it to ensure you avoid Probate to make your estate administration as efficient and cost-effective as possible.

Your financial advisor can provide some insight with experience from working with other clients. In addition, an attorney can help you clarify options that may work best for you, your family, and your plan.

RG Skadberg is an Indiana licensed attorney and co-founder of CCSK Law with offices in Valparaiso, Lafayette, and West Lafayette. He enjoys cutting through legalese and confusion to address people's questions and issues with explanations and solutions that people understand. Originally from Lafayette, he and his wife raised their two daughters in Valparaiso and are happy that both followed in their parents' footsteps to continue their studies at Purdue. 

Unless otherwise expressly indicated, the opinions or views expressed in this article are the author's own and do not reflect and may differ from, the opinions or views of StrategIQ® Financial Group, LLC or others within StrategIQ® Financial Group, LLC, including its officers, managers, owners, employees or other service providers.