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A Living Trust can prevent your assets from going through probate, minimize or even eliminate estate, income and capital gains taxes, and allow you to retain control over your assets if you are incapacitated or pass away. If you think of a Living Trust as creating a vessel to hold your assets in order to protect them, then to experience the benefits associated with a Living Trust your assets must be placed into the vessel. This process is called “funding” your trust.
I often tell my clients that a Living Trust is like a vessel or container to hold your assets in. In order to fully realize the benefits associated with a trust, the assets must be funded it to the trust before your death or incapacity. Although the forms and documents necessary to achieve that may vary for different types of assets, there are essentially two ways to “fund” asset into your trust.
Assets are funded into a trust either by either retitling them in the name of your living trust or by naming the trust as a beneficiary (either as primary or contingent beneficiary) of the asset. Which of the two methods you would use depends upon which type of asset we are dealing with.
Certain assets, such as bank accounts, stocks and mutual funds must be “retitled” in order for them to be funded into your trust. So for instance, for a married couple who have a joint living trust, their bank accounts would be titled as John Doe and Jane Doe, Trustees of the Doe Family Trust dated mm/dd/yyyy.
A Trust is funded with real estate in a similar fashion. However, because of strict legal drafting requirements it is generally advisable to let an attorney prepare the necessary deed(s) to retitle the property. There are also decisions to be made when the trust is drafted as to whether it should be a “direct” deed to trust or a Ladybird type (“beneficiary” type) deed to trust.
A Trust can also be also funded with assets by using beneficiary designations. These assets typically include life insurance policies, annuities and retirement benefits such as 401k, IRA and 403(b) plans.
To fund your trust with life insurance proceeds generally requires you to name your trust as primary beneficiary.
The rules for funding your trust with retirement benefits is a bit more complicated. Proper beneficiary designations must be made to achieve maximum deferral from income taxes. One of the primary concerns (even without a trust involved) when naming a beneficiary of a retirement account is preserving for the beneficiary the right to “stretch out” the withdrawals (called RMD’s) that must be made from that retirement account after the owner’s death.
Living trusts are the only way to retain control over assets for the benefit of a beneficiary (e.g. – a minor immature beneficiary) while at the same time being able to preserve such “stretch out” rights. Careful planning can achieve maximum income tax deferral benefits of such accounts and the control desired. You should consult your attorney before making retirement asset funding elections.
Although proper funding of a Living Trust requires some knowledge and leg work, the benefits are more than worth it.