An “Unfunded” Living Trust Isn’t Worth the Paper It’s Written On

living trust

You probably wouldn’t buy a car that didn’t have an engine or build a kitchen that didn’t have a stove in it. In fact, people might think there was something wrong with you if you did. Cars and kitchens have functions: to transport people and prepare food, respectively. Spending a lot of money on something that doesn’t fulfill its essential function makes little sense. Is that what you’re doing with an “unfunded” living trust?

Yet perfectly sensible people do that very thing when they make a trust-based estate plan and fail to fund the trust. In order to prevent problems with your trust you must understand how it operates, and what it means to fund a trust.

Living Trust vs. Will: What’s the Difference?

Both a living trust and a will are estate planning tools that direct the transfer of your assets to others (beneficiaries) after your death. As you probably know, a will describes your assets and who should receive them. A will is effective the moment it is validly executed, and assets transferred in a will must go through probate.

Many people prefer a living trust because assets in a trust don’t go through probate. To understand why, let’s talk about how a trust works. The trust is created by the trust document. The function of the trust is to contain assets contributed by a grantor (also called the settlor or the trustmaker). The trust assets are managed by the trustee for the benefit of one or more beneficiaries.

With many living trusts, the grantor, trustee, and beneficiary are all the same person. During the grantor’s life, they can use and enjoy trust assets just as if they, not the trust, owned the assets. They can change the trust or revoke it altogether. After the grantor’s death, the trust can no longer be changed. A successor trustee named in the trust document takes over managing the trust for the benefit of the remainder beneficiaries, also named in the trust document.

If the grantor failed to fund the trust, there is nothing for the trustee to manage or distribute. The assets the grantor likely wanted in the trust remain in the grantor’s own name, which means they must go through probate. The trust is completely ineffective. What’s more, if the grantor did not also have a will, the assets will pass as dictated by Michigan law—and possibly not to the grantor’s intended beneficiaries.

How to Fund a Living Trust (and What to Put in It)

A trust is like a water pitcher; if there is nothing in it, nothing can be poured out of it. Why do people fail to fund their living trusts? If they don’t have good legal guidance, they may mistakenly believe that simply creating the trust is enough.

A trust is like a water pitcher; if there is nothing in it, nothing can be poured out of it. Why do people fail to fund their living trusts? If they don’t have good legal guidance, they may mistakenly believe that simply creating the trust is enough.

Some people know that they need to fund their trust, but keep putting it off until it is too late. Or they may be confused about how exactly to go about funding the trust. Below is some general guidance about funding a trust, but you should confirm with your estate planning attorney to ensure that your actions will be effective.

Bank Accounts

You will probably need to visit the bank in person to re-title accounts in the name of the trust rather than your own name. The name on the account will be “John Q. Smith, Trustee of the John Q. Smith Trust” instead of just “John Q. Smith.” With some types of accounts, you will simply name the trust as a beneficiary or contingent beneficiary of the account so that the account automatically belongs to the trust upon your death.

Brokerage Accounts

If you have brokerage accounts and want to fund your trust with them, you may be able to do so simply by changing the name on the account to that of the trust. However, in some cases, you may need to have the securities reissued in the name of the trust; consult your investment professional.

Real Estate

Real estate is a valuable asset that can be used to fund a trust. If you own the real estate in your own name, you will have to transfer ownership to the trust by deed. A quitclaim deed should be sufficient for this purpose, but have your attorney prepare it to ensure that the deed is not defective.

If you own the real estate with others as “joint tenants with right of survivorship” and you want your co-owner(s) to take the property after your death, you do not need to put the property in the trust. The right of survivorship means that the surviving co-owner automatically inherits the property.

Vehicles and Other Titled Personal Property

You can even put vehicles in a trust by transferring the vehicle title to the name of the trust. However, if a vehicle is subject to a lien, you may have to get permission from your lender to transfer ownership to the trust.

Personal Property Without Titles

It’s one thing to transfer to a trust an account, piece of land, vehicle, or other asset whose ownership is documented. What about personal property like furniture, jewelry, books, and artwork that may not have papers indicating ownership?

Those items can also be placed into a living trust with a document called an assignment of ownership. The document must accurately and specifically describe the property being transferred (e.g. “princess-cut one carat emerald ring” vs. “my ring.” Your estate planning attorney can prepare an assignment of ownership document for you; a signed copy should be kept with your trust document.

Get Your Living Trust Questions Answered

Funding a trust involves a little more work than just walking out of your doctor’s office with a signed will, but if a trust is right for you, doing the work is worth it. Your attorney can help with some aspects of getting your trust funded, and the effort you have to put in will spare your family confusion and stress down the road

If you have questions about living trusts or funding your trust, we invite you to contact our law office located in Brighton and Northville to schedule a consultation.

Categories: Probate Litigation
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