Traditionally, the creation and funding of a trust to provide for your loved ones upon your passing was motivated primarily by a desire to avoid probate and make the administration easier and private. With the advent of Aging in Place Planning, and Guardianship Avoidance and Protection, two modern goals that focus on protecting YOU during YOUR life, trust funding becomes even more important.
Funding a trust is often described as the process of transferring ownership of your assets from your individual name to your trust. Having your assets owned by the trust provides you many different benefits directly related to the type of trust created, ranging from asset protection, tax avoidance or minimization, and/or probate avoidance. To ensure that you receive the full benefit of your trust, you physically change the titles from your individual name (or joint names if marries or domestic partners) to the name of your trust. A trust can only control the assets that the trust (trustee) owns.
You may have a well-designed and well-written trust document, but until you fund the trust, it doesn’t control anything. Unlike a will, you aren’t finished with a trust simply by signing the document; you must, with rare exceptions, fund your trust while you are alive, able and of sound mind.
With probate avoidance trusts, so long as title of property is not in an individual name, and non-trust assets avoid probate through direct transfer designations (beneficiary, transfer on death, and payable on death designations), the objective is attained. With trusts designed to capture additional benefits during your lifetime, however, merely avoiding probate is not sufficient; trust funding must also ensure control and management of the asset during your life. Even in a simple probate-avoidance trust, the trust-funding strategy should include changing the beneficiary designations of your life insurance policies, annuities, retirement accounts, and other investment accounts, to insure your trust so proceeds will go into your trust upon your demise. The limitations and disadvantages of direct transfer designations make them ill-suited to achieve lifetime planning objectives such as aging in place or guardianship planning.
In a lifetime planning trust such as one incorporating aging in place planning, trust control during you lifetime is paramount. An illustration will help understand the distinction and it's importance. Mary Baker has a non-qualified annuity on her life in the amount of $250,000 as part of her estate, and seeks to avoid probate, but also to avoid guardianship and a guardian's control of her assets, and age in place. Following her financial planner's advice she changes the beneficiary of the annuity to her trust. Although her attorney provided her with direction to change the ownership of non-qualified annuities to her trust, and forms to accomplish this change, she is comforted by the ease of a simple beneficiary change handled by her agent. Although she has effectively avoided probate the annuity remains in her individual name. A court-appointed guardian will quickly control the annuity, and may use it to whatever legal purpose the guardian articulates, including paying the guardian's fees and expenses, paying agents hired by the guardian, and paying for long-term institutional care in a nursing home over the objection of Mary Baker and her family!
If Mary Baker changes ownership of the annuity to her trust during her lifetime, a court-appointed guardian is not automatically conferred control of the asset upon appointment; in most states, a guardian must seek court approval to manage trust assets, and may only do so with prior approval of the appointing court. This distinction starts to explain the strategy of guardianship protection in a properly designed and implemented trust. At a minimum, the asset is not automatically available as incentive to a guardian: an asset generating a percentage fee for control and management. Moreover, your trustee can fight to protect the asset from guardian control with standing in the probate court. Better, your trustee can manage the asset to keep it unavailable to the guardian, by, for example, transferring the asset from a revocable trust far too easily accessible to the guardian, to another form of ownership less easily accessible to the guardian. Most importantly for aging in place planning, use of the asset for unwanted and avoidable institutional care is better controlled.
Funding your trust is not a difficult process. It is, nonetheless, a strategic process that will take some time and effort. The process may differ depending upon your trust, and/or depending upon your specific situation, circumstances, goals, and objectives.
Your first step is to make a list of your assets, their values and where they are located. Once you have your assets listed, let the trust funding strategy begin. Remember that any assets you are electing to fund into your trust will require changing the name on each asset to the trust and/or changing the beneficiaries to the trust.
If you have signed trust documents but are not sure if you have properly funded your trust, call your lawyer! Your lawyer can review your documents and let you know if the funding of your trust is complete. You can also review your funding effort against a checklist.
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