Aug 23, 2010

Living Trust: Fund it or Flub It

I'll call the couple Joan and Bill. They were in my office for a consultation, asking me to review their living trust (aka revocable trust). It had been prepared by another attorney and executed over five years ago.  As we began chatting, reviewing their documents and discussing finances, Joan and Bill dropped a bombshell on me:  I learned that they had never funded their revocable trust! In fact, this nice couple did not even know what "funding" was! Their living trust was the core of their estate plan, but they said that the lawyer who had drafted it had never told them about funding. They had a revocable trust - wasn't that sufficient?

I told them that without being funded, their trust was just a piece of paper, and worthless from an estate planning perspective.  We were all happy they had sought legal advice so this could be set right.

Funding a trust means switching your assets from your own name into the name of the trust. Assets outside your trust are not controlled by the trust. Thus, if Bill had died before we had a chance to set things right,  any assets Bill owned outside the trust, without a named beneficiary or co-owner, would have had to be probated, with the expense and hassle it can entail - exactly what they wanted to avoid.  

Funding your revocable trust is a vital part of your estate planning; however, not all your assets should be owned by your revocable trust. For example, 401ks, 403bs or IRAs should be left outside the trust, as transferring them to the trust would trigger income taxes. Other assets that may be appropriate to keep outside your trust are tax-deferred annuties, real estate, life insurance and limited partnerships. Your estate planning/elder law attorney can give you detailed advice.

As you acquire new assets, you will also have to make sure they are titled in the name of your revocable trust.

Bill and Joan were lucky: They caught their error before either of them became disabled or passed away. Remember, drafting and signing your revocable trust is just step one: you must also fund your revocable trust. Contact our elder law attorneys for guidance.

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