The word "funding" refers to the process of transferring your assets to your trust's ownership. When ownership is transferred, the trustee will take control of the assets.
Funding a Trust: Definition and Example
Funding a trust is the process of transferring ownership of assets that are titled in the settlor's name or in joint names with others. It retitles them in the name of the settlor's living trust. It may also entail naming the trust as the primary or secondary beneficiary of assets that require a beneficiary designation. The individual who establishes and funds a revocable living trust is known as the "settlor," "grantor," "trustmaker," or "trustor." Depending on the reasons for the trust, settlors may also choose to name themselves as trustees or beneficiaries of their revocable trust. All of these rules apply to a revocable living trust. The settlor cannot act as trustee of an irrevocable trust and, as the name implies, has no legal right to take assets out of the trust after they have been funded. Revocable trusts are not like that. Funding a revocable living trust ensures that the terms of the trust agreement govern the settlor's property. If the settlor becomes incapacitated, the chosen successor trustee can manage trust accounts. After the settlor's death, the successor trustee will be able to manage and transfer accounts held in the trust's name to the ultimate beneficiaries named in the trust agreement.How a Trust Is Funded
It is not enough for the trust maker to sign the agreement and expect the revocable living trust to work properly. After the agreement is signed, the settlor must "fund" their assets into the trust. Otherwise, trust is a useless, empty vessel. A trust is funded by transferring property into it. This depends on the type of property you're transferring. You can give the trust ownership of some assets. You may be required to name the trust as a beneficiary for others. A boat, car, motorcycle, or airplane, for example, can be transferred by creating a new title and naming the living trust as the owner. Untitled property, such as jewelry and collectibles, can be relocated by preparing a signed and dated document known as an "assignment of property." The trust is designated as the owner in the document. Tip: Untitled property is frequently listed in ownership documents as broad categories such as "electronics" or "furniture." These should be listed separately if you're transferring particularly valuable items, such as jewelry or art. Other assets that are frequently funded into trusts include: Bank accounts: These differ depending on the bank. It may be necessary to close an account and transfer the funds to a new account owned by the trust. Certificates of deposit (CDs): To avoid early withdrawal penalties, wait until the CD matures before opening a new CD in the trust's name. Securities: The cost of funding a trust with stocks, bonds, and brokerage accounts varies depending on the brokerage and the type of security. It is possible that stock and bond certificates will have to be reissued with the trust as the owner. Inquire with your broker about how to transfer ownership of these assets. Real estate: A quitclaim deed can be used to transfer real estate ownership. If you have a mortgage or are a member of a homeowners' association, you may need permission to do so. Note: Please keep in mind that your county or city may require you to complete additional paperwork in order to transfer real estate ownership to your trust legally. Partnerships, limited liability companies, and corporations can all have their shares retitled in the trust's name. Life insurance, retirement accounts, health savings accounts (HSAs), and medical savings accounts (MSAs) are all examples of financial products. Make the trust the beneficiary of all accounts and policies. If you're unsure how to transfer property ownership to your trust, consult your lawyer or the institution that holds the asset, such as your bank or broker. Once the trust owns your assets, they are protected from probate. They are managed by the trust and any trustees you've designated.Is it necessary to fund a trust?
Its funding is an important step in the process of establishing a revocable living trust. An unfunded trust is only worth the paper it's written on. It is critical to retitle your assets after you have worked with your estate planning attorney to create a revocable living trust that is tailored to your specific family situation and financial needs. Warning: Failure to properly fund a trust can result in a number of long-term issues.Your trustee is unable to manage assets.
A revocable living trust's trustee has no authority over any of the settlor's property that hasn't been retitled in the trust's name. If you start a trust without funding it and then become mentally incapacitated, your loved ones may need to establish a court-supervised guardianship or conservatorship to manage any assets that aren't held in the name of the trust. It's crucial to designate a replacement trustee to run the trust if you've been the trustee but are no longer able to do so due to mental incapacity.Probate may be required for assets
After your death, any property that has not been retitled into the name of your revocable living trust may have to go through probate. That negates one of the primary advantages of establishing a revocable living trust.Assets may not be distributed to the intended beneficiaries.
Property held outside of your revocable living trust cannot be disposed of or passed on to beneficiaries after your death, as stated in your trust agreement. If you do not also leave a will for assets that have not been funded into your trust, assets held outside of your trust may pass by intestate succession. Funding your trust ensures that your assets are directed in your desired direction.Important Points to Remember
- Funding a trust refers to the process of transferring your assets to your trust. Depending on the type of property, different methods will be used.
- Assets titled in the name of the settlor or in joint names with others are retitled in the name of the revocable living trust. For assets that need a beneficiary designation, the trust can be designated as the primary or secondary beneficiary.
- After ownership has been transferred, the trustee will be in charge of these assets.
- When you properly fund a trust, your assets are under the control of your named trustee and go to the correct beneficiary. After your death, they are not required to go through probate.
