What is Involved in “Funding” my Trust?

To put it simply, “Funding” is transferring your ownership or interest in property into the trust. If you think of your trust as a vehicle for transporting your assets to your heirs, then it’s easier to picture loading them into your trust. The reason why this is so critical is that if property or assets are NOT transferred to your trust, then they will have to be transferred, either to the trust, or to your heirs through some other process.

Don't set sail without loading your cargo first!

For Example: Prior to your death - If you transferred your residence into the trust, that’s great, because now the trust controls how your residence is transferred. On the other hand, if you had some investment property that you were hoping to develop and didn’t transfer it to the trust before you died, it would have to be transferred into the trust using probate or some other mechanism. If it’s outside the trust, the trust cannot “control” it or transfer it.

Real Estate

Real Estate includes land, houses, condos, townhomes, farm ground, parking spaces, easements, rights of way, certain water rights and essentially anything with a deed. Transferring it to a trust can be straightforward or very tricky depending on the nature of the asset, encumbrances and the type of trust.

In many jurisdictions, simple land may be transferred using a “Quit Claim Deed” but this is not always optimal. A QCD is a property transfer that doesn’t have a guarantee. To preserve a clean line of title, some jurisdictions allow a Special Warranty Deed if there is an encumbrance on the property like a mortgage or a Warranty Deed to guarantee clear title. (Please be cautious when transferring title when a debt or lien exists, because that may violate statutes like the Garn-St. Germain Depository Institutions Act of 1982 or a Fraudulent Transfer Act which could result in the transfer being undone or an immediate demand for payment in full of the outstanding debt.)

Homeowner’s Associations, leases, and other encumbrances may further complicate the transfer… Failure to transfer real estate; however, usually results in the requirement to probate an estate. There are very few alternative mechanisms to transfer real property after death so it is critical to get the real property into the trust if excessive administration costs are to be avoided.

It's rare that funding real estate into your trust is a bad idea.

Titled Personal Property

Titled Personal Property includes vehicles, trailers, boats, airplanes, business or farm equipment and basically anything that has a title document. Many commercial items like this belong to a business entity like a limited liability company, partnership or corporation. Personally owned vehicles or other titled property may or may not be transferred to the trust depending on jurisdiction, insurance, liability and other issues. Key questions to ask before transferring a title are:

1.      Will transferring this item to my trust incur liability? (e.g. A personal vehicle would require a change in insurance which would now list the trust…which could be easily ascertained by an opposing personal injury attorney in the event of an accident…);

2.      Will transferring this item require a change to my insurance? And would the result be better for my pocketbook or worse?

3.      In my jurisdiction, is there an easy way to transfer a titled asset without having to go through probate…if it’s not in the trust? (e.g. Small estate affidavit or naming the trust as a contingent beneficiary on the title?)

Please be cautious and find out first if transferring ownership will result in substantial taxes or fees. Additionally, if the item is subject to a lien, you will want to get the approval of the lender before transferring it to the trust.

Collectable cars are a shoe-in for trust funding.

Untitled Personal Property

Untitled Personal Property is tangible (e.g. “touchable”) personal property that doesn’t have a title document (e. g. like furniture, books, jewelry, tools, collectibles, dishes, clothes and even sometimes art) can be transferred with an assignment of ownership document, which must be signed and dated.

In the event there is an item of particular value, it is really important to adequately describe the property, so that there is no doubt about its identity. In many cases, items like firearms or valuable collections or artwork will require a specialized assignment.

Non-qualified Financial Accounts

Non-qualified Financial Accounts refer to “cash” accounts that are not tax sheltered for retirement purposes. They include checking and savings, CDs, money market or investment accounts, etc. Qualified or Tax-sheltered accounts should not be transferred to your trust unless doing so is absolutely necessary to accomplish your estate planning goals. (Generally, a transfer of your Retirement type accounts will trigger a “cash-out” meaning that tax will immediately be due and payable.) Transferring a “cash” account may require that a new account is opened in the name of the trust so that money can be transferred from the old account to the new trust owned account.

Alternatively, your financial institution may allow the trust to be designated as a “pay on death” beneficiary…but be cautious as many financial institutions will not allow the account to transfer easily following the death of the client. Many will require letters testamentary which can only be granted by a probate court. It is far less risky and straightforward to transfer the ownership of the account to the trust beforehand.

Be sure to build a plan that includes your business.

Business Interests

Business Interests include shares, stock, interest certificates in partnerships, limited liability companies (e.g. LLCs), corporations, and other entities. These business interests may be transferred to a trust if the partnership agreement, LLC operating agreement or articles of incorporation allow for the transfer. Issues may arise in terms of asset protection, tax structure and governance if the transfer occurs improperly.

Please be cautious and determine with exactness the outcome of a business ownership transfer. If an immediate transfer is not in your best interest or is not allowed by the governing documents, a “springing” transfer may be a good option to consider.

Life Insurance and Annuities

Life Insurance and Annuities include term, whole life or hybrid instruments that are typically not part of a retirement, tax sheltered product. The policy itself may be transferred into the trust directly or may name the trust as a beneficiary. Making the trust the owner may allow the trustee to manage the policy in the event the trustmaker(s) become mentally incapacitated. Careful consideration of tax issues before completing such a transfer should be a high priority.

Asset protection may come into question. In many jurisdictions the cash value of a policy is exempt from creditors if it is owned by an individual and not a trust.

Royalties, Copyrights, Patents, Trademarks, and Digital Assets

Royalties, Copyrights, Patents, Trademarks, and Digital Assets have widely varying rules about transfer and ownership. Many of the above may be maintained in a business entity and thus transferred directly into a trust. Generally, whoever pays royalties can advise you on what is required to transfer them to your trust.

Digital assets may or may not fall under copyright law. Knowing how online assets may be managed or accessed is critical to providing access and benefit of ownership to heirs. United States Copyright Office has additional information for copyrights, and the United States Patent and Trademark Office for patents and trademarks.

Crypto requires special care.

Please be very cautious where Digital Currency is concerned. Access to “wallets” may be individually keyed, and once a password or verification method loses function, the asset may be lost forever.

In conclusion, the funding process is what makes your trust useful. If you fail to put an asset in, then the trust has no control over that asset. The decision to fund an asset into your trust, however, is highly contingent on circumstances. I advise you to engage a professional to guide you through the process or take the time to fully understand and appreciate the nuances before acting. In any case, failure to act turns your estate planning portfolio into a very heavy, very expensive paperweight rather than an effective planning tool.

Curry Andrews, Attorney