What does it mean to “fund” a trust?

Funding a Revocable Trust: A Step-by-Step Guide

When it comes to estate planning, a revocable trust (also known as a living trust) is one of the most popular tools for organizing assets and ensuring your wishes are carried out after your death. However, simply setting up a trust is not enough to make it effective. To fully benefit from a revocable trust, you need to fund it — that is, transfer ownership of your assets into the trust.

In this post, we will walk you through what it means to fund a revocable trust, why it’s important, and how you can do it.

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What is a Revocable Trust?

A revocable trust is a legal entity created to hold and manage your assets during your lifetime and distribute them after your death, according to your instructions. Hopefully having a revocable trust allows you to avoid probate and maintain privacy, which is why many people choose it for their estate planning needs.  It may also help you in creating trusts for your children and/or grandchildren or a trust for a person with a disability.

The key feature of a revocable trust is that it can be changed or revoked at any time while you are alive and competent. You can add or remove assets, modify terms, or even dissolve the trust entirely.

However, the trust only works if it’s properly funded. This means that the assets you want to be managed or distributed by the trust must be transferred into it during your lifetime or at your death.

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Why Funding a Revocable Trust is Crucial

When you set up a revocable trust, you appoint a trustee (usually yourself, during your lifetime) to manage the assets in the trust. But if you don’t transfer your assets to the trust, those assets will remain in your name.

Without proper funding, the trust can’t carry out its intended purpose — avoiding probate and ensuring seamless asset management and distribution. This can result in unnecessary legal delays, extra costs, and potential confusion for your heirs.

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Step-by-Step Guide to Funding Your Revocable Trust

Here’s how you can ensure that your revocable trust is properly funded:

1. Open a Trust Account (if necessary)

• If you want your trust to hold assets like bank accounts or investment accounts, you may need to open accounts in the name of the trust. Visit your bank or financial institution and provide them with a copy of the trust document or the “Certification of Trust,” which is a document that outlines the important parts of the trust.
• Typically you (as the Grantor or creator of the trust) can use your own Social Security Number for the trust.

2. Transfer Real Estate to the Trust

• Real estate is one of the most important assets to transfer into your trust. To do this, you’ll need to sign a new deed, transferring the property from your name to the trust. The deed will need to be recorded in the county where the property is located. It’s important to consult a lawyer or title company to ensure that this is done correctly.
• You can transfer property from other states into your trust but should work with an attorney in the state where the property is located to in order to properly transfer the real estate.

3. Transfer Bank Accounts and Investments

• Bank accounts: Contact your bank to change the ownership of your account to the trust’s name. You will need to provide a copy of the trust and any other documentation required.
• Investment accounts: If you have stocks, bonds, or mutual funds, you’ll need to transfer them to the trust as well. This usually involves contacting your broker or financial institution and completing a transfer of ownership form.

4. Transfer Personal Property

• Personal property like jewelry, art, and valuable collectibles should be assigned or transferred to the trust. You typically will complete an “assignment of personal property,” directing that personal property not specifically transferred to the trust be added at your death.
• You can create a personal property memorandum that details the items you wish to be distributed to a particular person.  In Wisconsin, you can have a list of this property that is outside of your Trust or Will.

5. Update Beneficiaries on Retirement Accounts and Insurance Policies

• While you can’t directly transfer retirement accounts (e.g., IRAs, 401(k)s) and life insurance policies to the trust, you can name the trust as a beneficiary. This ensures that the trust receives these assets after your death. However, keep in mind that the tax implications of doing so may vary, so consult with a financial advisor or estate planner.

6. Transfer Business Interests

• If you own a business, you may want to assign ownership interests (e.g., shares in a corporation or membership interests in an LLC) into your trust. This may require updating operating agreements or shareholder agreements, so it’s advisable to seek legal counsel for this.  You must review any operating or shareholder agreements first!

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Common Mistakes to Avoid

While funding a revocable trust is relatively straightforward, there are a few common mistakes to avoid:

1. Not Funding the Trust Properly: Forgetting to transfer key assets, like real estate or investment accounts, is the most common mistake. If you don’t transfer assets to the trust, they will go through probate.
2. Overlooking Retirement Accounts: As mentioned, retirement accounts cannot be directly transferred to a trust during your lifetime, but you must ensure that you have named a beneficiary, whether a person, your trust, or a charity.
3. Failing to Update Beneficiary Designations: If your beneficiaries on life insurance or retirement accounts do not match the terms of your trust, the assets will go to those named beneficiaries, bypassing the trust entirely.

Funding your revocable trust may seem like a lot of work, but it’s one of the most important steps you can take to ensure your estate plan is effective. Proper funding helps your trust operate smoothly, avoids the costly and time-consuming probate process, and ensures that your assets are distributed according to your wishes.

Before making any changes, always consult with an attorney, estate planner, or financial advisor to ensure you’re following the best practices for your specific circumstances. Proper funding may take some time and effort, but in the end, it will provide peace of mind for both you and your loved ones.