Do Your Homework – Fund Your Revocable Trust

It is a major accomplishment to see an Estate Planning attorney and prepare a Revocable Trust. If you have done this step, you are by far more prepared than a majority of Arizonans in ensuring your assets avoid probate and pass efficiently to your loved ones upon your death.

Why Is Funding Your Trust Important?

However, just setting up a Trust is not the end. It is actually just the beginning. The next and most important step is to “fund” your Trust. Funding your Trust means transferring the ownership of the assets from your name into the name of the Trust. This step is important for a few reasons. First, and most importantly, funding assets to the trust is the only way to avoid probate. This is because you, personally, no longer own the assets therefore there is not a disruption to the ownership of the assets when you pass away. The Trust owned the asset prior to your passing and continues to own it. Second, the successor trustee can manage any assets in the Trust quickly without waiting for court approval (Probate). Finally, it is much more time-efficient and cost-efficient for you to change the ownership of an asset to your Trust than to leave it to your Personal Representative upon your death.

The Process of Funding Your Trust

It is easy to say, “OK, now fund your Trust”; however, each asset you own will be treated differently when it comes to how it is funded into your Trust. This is where an experienced Estate Planning attorney can provide significant value and expertise. We have funding instructions that we provide to our clients as well as a discussion going through each asset they own and the specific instructions to fund that asset. Each asset has its own method of funding which must be followed.

Real Property

The first asset we discuss with clients is how to fund their primary residence and other real property into the Trust. You can confirm the ownership of your real property by going to the County Recorder to see the most recently recorded Deed. Therefore, when you fund your primary residence to the Trust, you must sign a deed saying you are transferring it from your name into the name of your Trust. Then, this Deed must be recorded. This step is something Dana Whiting Law can help with by preparing the Deed and recording it with the County Recorder. For real property outside of Arizona, we have companies we work with to change the ownership to the Trust.

Bank & Investment Accounts

The next most common assets our clients have that needs to be funded to the Trust are bank accounts and investment accounts. The important thing to remember when funding these types of accounts is that the owner of the account must be changed to the Trust. Even if this was a joint account, the Trust should become the owner. Beyond avoiding probate, this will help your successor Trustee quickly access assets that can help cover immediate expenses following your passing. To change the owner of the accounts, you should take your Certificate of Trust to the financial institution and instruct them to make the Trust the owner of the account. A Certificate of Trust is a short document that gives the financial institution all of the information they need about the Trust including who created it, who is the Trustee, what is the name of the Trust, and the tax ID associated with the Trust. We prepare the Certificate of Trust for our clients along with the Trust.

Some banks advise against making the Trust the owner of your smaller accounts that you use for operating expenses. While this is not best practice, it can be burdensome to go through the process of changing the owner to the Trust. If that is the case, we recommend clients at a minimum add the Trust as a “pay-on-death” beneficiary or “transfer-on-death” beneficiary to the account. This would allow the Trustee to collect the account upon your death by presenting a death certificate and the Certificate of Trust.

Assets Controlled by Beneficiary Designation

This leads to the assets that are controlled by beneficiary designation. The two main assets under this category are life insurance policies and retirement accounts. For life insurance policies, we always recommend updating the beneficiary of the policy to be your Trust. This ensures that it will correctly flow through the Trust according to the plan you created and avoids the potential of probate should your named beneficiary predecease you. This is also the best way to utilize asset protection planning established in your Trust for your beneficiaries. If the life insurance policy pays to the Trust, it can be added to an asset protection trust for your spouse to use during his or her lifetime or into trusts for your children that are protected from divorce or personal liabilities. We often discuss with our clients how the life insurance policy beneficiary designation can best be utilized to enhance the asset protection of their Trust. To update the beneficiary designation, many companies now have an online portal that allows you to quickly remove old beneficiaries and insert the Trust. We work with clients to complete the forms if it must be done by mail.

A retirement account is the other common asset that is controlled by beneficiary designation. As you know, traditional retirement accounts such as IRAs or 401ks receive contributions from you and your employer pre-income tax. This means that they have the potential for greater growth because a larger amount can be contributed. The consequence of this is that when a distribution is made from the retirement account, it generates income tax liability. For this reason, we do not advise that your Trust should be the beneficiary of a retirement account without proper planning and discussion of the income tax consequences. Your Trust must have specific language in it to qualify for the most tax-advantageous treatment; therefore, do not designate your Trust without confirming from an attorney that your Trust contains this language. Individuals such as your spouse and then you children are the most common beneficiaries of retirement accounts.

Other Assets

There are various other types of assets that individuals own that can be funded to your Trust. A small sample include business interests (LLC membership or shares in a corporation), vehicles of significant value, paper bonds or Treasury Direct accounts and mineral interests. For all of these assets, the best practice is to make your Trust the owner. This can be done by providing the Certification of Trust to the agency or company managing the asset.

Your best tool is the Certificate of Trust which will ensure you have properly funded the asset, and they have on record the correct Trust information. All of this “homework” outlined above does take some effort; however, it is worth it to avoid probate and ensure efficiency for your future Trustee and beneficiaries.

Contact Dana Whiting Law

At Dana Whiting Law, we don’t just leave you to figure out your homework alone, we provide detailed instructions and have our attorney’s and Funding Coordinator available to help provide direction, complete forms and even have meetings with your financial advisors and accountant. Call our office at Dana Whiting Law if you would like to set up a meeting with an attorney to discuss how we can help ensure your Trust is properly funded.