Funding Puts the Fun-(ction) in Your Trust

TL;DR – The short version if you want to

Here’s how to fund a Trust in Indiana, and what happens if you skip the step most people miss.

• Signing a Trust isn’t the same as funding it.
• Funding means moving your assets, like your house, your accounts, your investments, into the Trust’s name.
• Skip that step and the Trust sits empty.
• An empty Trust can still send your estate through probate.

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Funding.

I have always struggled with the use of the term “funding” as it pertains to trust planning.

In reality, a more appropriate term would be transferring, but the law defines the process as funding.

For formality, “funding” is the word we use to describe the process of moving an asset from your name (i.e., ownership) to the name of your trust.

There are two reasons we fund our trusts:

• First, it allows your assets to be managed by the plan that you outlined in your trust.
• Second, it can avoid having assets in your name after your death to eliminate the expense and time of Probate to administer your estate.

I explain the reason and process to my clients this way:

“We create a funding plan to make sure we know the disposition or transfer of current and future assets.  It is important to know what goes into your trust, when it goes in your trust, and what things, strategically, will not go in your trust.”

When Does Funding Take Place, i.e. When Do Assets Move to the Trust

There may be some assets we move into the Trust immediately. There may be assets that transfer in the future by way of beneficiaries, transfers on death, or payable on death provisions.  In addition, there may be some assets that transfer to persons or entities without trust involvement.

It is very important to understand that merely creating a Trust and noting that you intend to move your assets to the Trust are not enough to complete the funding process.  Unfortunately, this happens more often than it should.

Merely noting an intention to transfer without actual transfer often results in the Probate of some assets.  This adds time and expense to an estate’s distribution process because a court needs to be involved.  The court has specific timelines and requirements which must be followed to complete the process.  In most trust-based estate plans, the attorney will include (dare I say “should include”) a Last Will with a Pour-Over provision.  This gives instructions to the court, including the Probate assets “pour-over” to the Trust at the conclusion of Probate.

The unfortunate part of going through Probate is that it potentially adds thousands of dollars and six months to a year to the process.  A properly designed and executed funding plan should eliminate this from happening.

So, what goes into a funding plan?

First, complete an evaluation of all your assets.  Take some time to think about more than the obvious real estate, current bank accounts, and vehicles.  Think about insurance policies and retirement plans that may have been acquired at different times of your life through different jobs.  Maybe you have an old bank account or two that you no longer use, but which have some value.  Savings bonds, stock certificates or an old stock account from your old “day-trader” efforts are easily missed.

Make a list of these assets and how they are currently owned. It is important to understand:

• if they are in your name,
• held jointly with a spouse or someone else,
• if you hold a specific percent interest, or if
• you are a beneficiary or an heir of property that has yet to be transferred.

Next, determine what should be moved now.  While ten or so years ago, it was easy for an attorney to tell a client to “move everything into your trust,” the process is more complicated now.

A Quit Claim Deed, a new signature card at your bank, and a call to your financial advisor to tell her to move everything to the Trustee of Your Family Trust may have worked then.

However, in today’s world, it isn’t that easy.

Asset-by-Asset Considerations

There are considerations to decide if or how to move your bank account in your trust.  Also, today, to change the ownership of your bank account, many banks require you to close your current account and open a new one in the trust.  That may cancel your autopayments and auto-deposits.  It makes your current checks and debit cards useless, too.  There are options to consider the transfer of your bank accounts to your trust.  Options may be based on the amount you keep in your bank account and ways to transfer ownership at your death.

A Quit Claim Deed that transfers your home with a mortgage secured to it might cause your mortgage company to start asking questions about your trust.  If you refinance your house that is in trust, most mortgage companies require property to be “taken out” of the trust for underwriting.  The mortgage and new deed are issued at closing in your name.  Rarely does anyone remind you to re-deed the property back to the trust.

There are advantages and disadvantages to consider.  Either way, make sure you have a plan for the property to move to the trust in some way.

Investments and Other Assets

The various “investments” you own, and the funding plan vary substantially. It is important to talk to your advisor about the types of assets you own, such as stocks, bonds, mutual funds, other investment funds, annuities, IRA, and retirement plans, such as 401s, 403s, SEPs, etc.  Each of these assets have different rules about how they fund or don’t fund into the trust.  Your advisor knows your big picture plan and can make suggestions accordingly.

Other tangible personal property assets, such as vehicles, bank accounts, and items around your house, need to be considered, too. 

Anything with a title, a defined ownership position, or assets with beneficiaries requires a separate action to make sure you know where the asset will move or if it will stay in your name. Items around your house that normally don’t have ownership papers or titles need to be accounted for as well.

Some property in your name after your passing won’t necessarily cause Probate. It is important to know what those things are and that they, collectively, avoid Probate. That ensures that your estate administration is as efficient and cost-effective as possible.

If you have any questions, thoughts, or concerns about your Funding Plan, give our office a call. We’d be happy to review things with you to make sure your Funding Plan is FUN-ctional.

Frequently Asked Questions
How to Fund a Trust in Indiana