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Tending to Your Living Trust: The Importance of Proper Funding & Other Helpful Tips

Posted by HMS Law Group | May 18, 2017 | 0 Comments

A revocable living trust allows the grantor of the trust (the person who establishes the trust) to control trust assets during his or her lifetime and names subsequent beneficiaries of trust assets upon the grantor's death. A revocable living trust is commonly used to help avoid the probate process and preserve privacy following a grantor's death. In addition, administering a trust is also generally easier, faster, and more cost-effective than probating an estate.
To benefit from these advantages, however, you must ensure that your living trust is adequately and properly funded. If it is not, your descendants and beneficiaries may endure a lengthy and expensive probate proceeding and your estate could be transferred to unintended individuals.

Inadequately Funded Living Trusts

If assets are not properly titled to your trust, then the trust does not legally hold title to your assets, causing complications at death. The way to fund a trust is by legally transferring title of your assets into the name of the trust. For example, you can transfer real estate into your trust by executing a trust transfer deed and recording this deed in the county where the property is located. To place a bank account or brokerage account into your trust, you can list the name of the trust and date the trust was established on title to the account. Failure to assign, transfer and/or rename assets into your trust will result in an under-funded or completely unfunded trust.

It is also important to remember to properly address your retirement accounts and life insurance policies. Because many people hold accounts and policies of substantial value, it is important that the distribution provisions for these assets mirror the distribution provisions within a revocable living trust. Therefore, it is generally recommended that special exhibits to retirement plan beneficiary designation forms be prepared and that a revocable living trust contain the necessary provisions to allow the trust to hold proceeds of a retirement account without triggering a premature termination of that account. A premature termination might result in the payment of income taxes that could have otherwise been minimized or avoided. In addition, it is generally recommended that a revocable living trust be named as the beneficiary of all life insurance policies not held in an irrevocable life insurance trust. This allows for the insurance proceeds to be used to pay debts of the grantor's estate and ensures that the life insurance proceeds are distributed according to the grantor's wishes as evidenced by the terms of the trust.

If you do not adequately fund your living trust or properly designate beneficiaries, then it may be necessary to probate your estate. Probate is time consuming, expensive, and defeats one of the primary purposes of establishing a trust.

In addition to ensuring that your trust is adequately funded, there are a few other solutions to this problem. One involves executing a pour over will that names your trust as the beneficiary of any assets you forgot to place in the trust before your death. Another involves executing a general transfer asserting that your intention is to place all of your assets into your trust and name your trust as the beneficiary of your life insurance policies and retirement accounts. Furthermore, it is important to prepare a Schedule A to your revocable living trust indicating which assets are held in the trust. Each of these documents help ensure that the trust receives all of a grantor's property, and that a grantor's assets can ultimately be distributed according to the terms of the trust.

If you are considering establishing a revocable trust or reviewing your existing trust, you should enlist the help of a qualified estate planning attorney to ensure your trust is executed correctly and is adequately funded. Attorney Rebecca Gardner at HMS Law Group, LLP has nearly 15 years of experience representing clients in all types of estate planning issues, and is here to help you!

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