And now, a short story that is more truth than fiction, you became a hero to your family when you created an estate plan. You took home a binder full of signed documents, put it in a safe place and forgot about it. Weeks, maybe months later, you vaguely remember that your lawyer mentioned something about funding your trust but that thought quickly slips away as you carry on with your daily tasks. Unfortunately, this exact scenario occurs far more often than many estate planning attorneys want to admit.
Like so many other families, you failed to properly fund your trust. Suddenly, your plan needs to be put into action, but instead of quietly and efficiently transitioning control of your assets, which is what a trust is intended to do, your assets end up in limbo. If you are incapacitated, a guardianship action will be needed to sort things out. If you have moved on to the next world, a probate action is required to pass on your assets. Despite your best intentions, your loved ones will be at the mercy of the court process.
Creating a trust-based estate plan is only the beginning. Failing to fund a trust is a common mistake. Let’s start with some basics. The act of placing your assets into the trust is called “funding” and is accomplished by re-titling your assets in the trust’s name. You can think of your trust as a brand new, fully loaded, environmentally friendly SUV. It’s the shiny new vehicle sitting on your driveway ready for a spin. This SUV can do just about everything but drive itself. There’s plenty of cargo space and what doesn’t fit in the back can easily be placed in a trailer. The SUV will have no problem pulling the load. Inside this gem, the passenger space is unparalleled. Your spouse, children, and pets will all have room to comfortably sit.
Unfortunately, your new toy is not going anywhere without any fuel. Here, the fuel for your trust are your assets. To properly fuel your trust and get its engine to start revving, it must be funded with your assets. Indeed, an asset-less trust is little more than a paperweight.
Funding your trust can be a time-consuming process. You must retitle bank and investment accounts, real estate, life insurance and other assets. You may also need to change beneficiaries on IRA’s, retirement plans, annuities and life insurance. Also, your trusts must be added as additional insureds on homeowners and vehicle policies. The biggest thing to remember is that trusts only control assets that are titled in its name. Assets still titled in your personal name remain independent of the trust. What is the point in spending time, effort, and money creating a trust but then failing to take the next step and funding it?
Funding your trust is the essential component of an effective estate plan because it will keep you in control of your assets while you are alive and will provide for you and your loved ones if you are incapacitated or pass away. Your affairs will stay out of the public eye and your heirs skip the probate process. Funding your trust is an ongoing process.
The more enterprising and engaged person took the estate binder, went home and made appointments at their financial institutions. Following the lawyer’s advice, they retitled their assets in the trust’s name and otherwise correctly funded their plan. A couple years down the road, they purchase a vacation home and some other assets, but forgot how to properly title them, so instead they put them in their individual name. While everything to this point has been good, they will have inadvertently caused a split of their assets because some are held outside the trust. Fortunately, there is a simple fix to this problem.
But, if you neglect to transfer new assets into the name of your trust, you run the risk of having your beneficiaries still having to go through the probate process.
What can happen?
Probate is a lawsuit against yourself for the benefit of your creditors that your estate pays for. After paying off your creditors, your beneficiaries get the remainder of your assets. This can be a costly and lengthy process, which makes it an emotional rollercoaster. Creating a trust based estate plan provides control over your assets during your lifetime and after you pass away. Indeed, creating a trust plan and not funding it is THROWING MONEY AWAY! The first waste of money is purchasing the plan and failing to fund it. The second instance will be paying all of the costs necessary to probate the will. Standing alone, probate is not a negative thing. It’s a process that for many reasons may not be the best plan for your family.
Returning to the SUV analogy, a will based plan can be similar to the decked-out SUV described above. But, one significant difference is that this SUV just sits unused until you die. To add a small insult, your heirs must first petition a court to get the keys to that SUV. Yes, the judge will give them the keys, though only after the creditors have been paid.
Your estate will possibly pay more in taxes
Probate can also result in estate taxes that would otherwise not have been due. Your beneficiaries won’t be able to take advantage of important estate tax or asset protection strategies if you fail to properly fund or update your trust or update. One of the features of a trust-based estate plan is that you can give your heirs greater asset protection than they could get for themselves. Passing assets through a trust can help your heirs by providing a safety net when starting a business, ensuring that their chosen spouse is truly in the relationship for the love and companionship (not just the money), and other protections.
You may unintentionally disinherit loved ones
If you own any assets that you would like to pass down to loved ones that are not next of kin, you could potentially disinherit them. The blended family presents its own set of challenges. A step-parent may raise a child from toddler-hood, but unless the step=child has been specifically named in the step-parent’s estate documents, the child will receive nothing when the parent passes away. On the other hand, you can also unintentionally make someone an heir to your assets that you would not want them to. Recently, we learned about a couple that been separated for nearly a decade, but never divorced. Each spouse has their own house, which is homestead property. But, neither spouse has an estate plan. Their child was shocked to learn that the homestead property would devise to the existing spouse as a matter of law because there is no plan! The law of unintended consequences can have some harsh results.
Being a hero to your family means you go the extra mile. It means you sacrifice a bit of your time and energy to make sure everything is in order before you turn in for the night. As a hero, you pay attention to the details and see things through. You invested the time, money, and effort into creating a trust-based estate plan for yourself and your loved ones. Don’t rest until the trust is fully funded.
 We recognize that the current Congress has proposed eliminating the estate tax. As with any legislation, there are no changes until it’s formally signed into law.