You probably recommend trusts over wills to many of your estate planning clients because revocable living trust-based estate plans provide a comprehensive solution for many of your clients’ needs. Of course, it’s not necessarily an either/or scenario. Your clients should also use a will to take care of any assets not in their trust and to name a guardian for any minor children.
A revocable living trust with a pour-over will help your clients avoid probate, maintain privacy, and plan for incapacity, but what happens if the trust isn’t funded? You could end up with a comprehensive but useless piece of paper. It’s one of the biggest mistakes people make when establishing living trusts.
Unfunded trusts
An unfunded trust does not hold title to the grantor’s stated assets at death. The trustee can only help control assets titled in the name of the trust. If assets aren’t legally assigned or transferred to the trust, those assets won’t pass to the designated beneficiaries and could be subject to probate. In a worst case scenario, an unfunded trust could result in assets being distributed to creditors rather than beneficiaries.
A pour-over will can help mitigate some issues by transferring assets into the unfunded trust, but just like any other will, a pour-over will is subject to the probate process. This process can lead to protracted battles over an estate, which were meant to be avoided through the establishment of a trust. What’s worse, without a pour-over will, the unfunded trust is simply a trust agreement and essentially useless from a legal standpoint.
Funding the trust
Clients can fund a trust in several ways, including legal assignment or retitling the assets in the name of the trust. Bank accounts, for example, can be transferred to the trust by listing the name of the trust on the account title.
The process of assigning or transferring accounts and assets to the trust should begin as soon as your client executes the trust. Your practice can provide basic guidance on trust funding and in some cases, may be able to provide comprehensive funding services. Outside of your office, banks can provide instructions for customers on what they need to do in order to transfer bank or investment accounts to the trust. Real property is a little more complicated, and requirements vary by state. Generally, the grantor is required to record the deed in the name of the trust.
Establishing a living trust and properly funding that trust are essential steps for achieving your client’s estate planning goals. Document drafting software for attorneys can help you streamline your document drafting process and get your client’s estate plan started on the right foot. Download WealthCounsel’s revocable living trust sample to see an example of how our software can help your practice.