What Does Funding A Living Trust Mean?

When a person dies with or without a Will, if they have enough money at the time of death, the law requires the person’s assets to go through a court process in order to be passed to the person’s beneficiaries. The trigger that requires this court process, legally known as probate, is the person’s death. Assets owned by a living trust, however, avoid the probate process, since it is not a person and in essence never dies. Therefore, many families choose to create and own their assets through a living trust instead of in their own names.

A living trust is very similar to a Will. It is a document that states who is entitled to receive an inheritance. The living trust is crafted to become its own legal entity comparable to creating a corporation, but owned by individuals or jointly by married couples. The trust is usually named after the person or persons creating the trust. A single person, for example, would name their trust “The John Smith Living Trust”; married couples frequently use their last name, such as “The Smith Family Trust”.

When a living trust is first created, signed, and notarized, a process known as “funding” the trust needs to take place. Funding a trust happens to be a very simple process to understand. Funding a trust is a change in ownership of an asset from an individual into the name of a living trust. A person just removes themselves as owner and replaces their living trust as the owner. For example, John and Mary Smith would remove themselves as joint owners and replace the owner as “The Smith Family Trust”.  That’s it. That’s all funding is. A simple change of ownership of an asset from the individual to the living trust, which is owned and controlled by the individual.

Let’s take a look at funding a bank savings account. A savings account is currently jointly owned by John and Mary Smith. John and Mary visit their bank and show the trust document to the bank officer. The bank officer then removes John and Mary as owners of the account and replaces the owner to be “The Smith Family Trust”. The Smith Family Trust now is the owner of the savings account. Technically, John and Mary no longer own the account. However, John and Mary are still in full control of the account since they are the owners of the trust. They can still make withdrawals from the account, or even close the account and open a new account at another bank, just as easily as before they created their trust. When the time comes to pass the account on as an inheritance, it will be immediately distributed to John and Mary’s beneficiaries named in the trust without having to go through the probate court process.

Are All Assets Funded Into A Living Trust?

Funding needs to be done with all major assets of value owned by the person who created the living trust. Major assets would be property, such as a principal residence, CD’s, mutual funds, and stocks and bonds. These days it is really easy to fund a living trust. Because of their popularity and frequent use, all financial institutions have plenty of customers who own their assets through their living trust. When informed of a living trust, they will know exactly what to do and help their customer complete a change of ownership. One asset, however, is a bit difficult to complete funding and that is real estate. For real estate, a whole new transfer deed needs to be prepared showing the name of the living trust as the owner. Once signed and notarized, the new deed also has to be recorded with the county recorder. Usually, an attorney will prepare these new deeds for their clients, which can then be mailed or electronically filed with the county recorder. Usually, in two months or less, the county recorder will send back the newly recorded deed.  

There are tangible assets and personal property that cannot be funded into a living trust, such as household furnishings, personal items, jewelry, golf clubs, etc. For this reason, a living trust includes a document known as the Assignment of Personal Property. It is designed to work in conjunction with the living trust. Basically, it’s a catch-all. Upon death, it scoops up all the miscellaneous tangible assets and grants them into the trust. Then, those assets are divided up and distributed according to the instructions of the Trust. Additionally, any item can be given to a particular beneficiary by specifying the item as a special gift.

Some assets generally are not funded and owned by the living trust. Retirement plans and life insurance are the two most common assets not funded. Since retirement plans are governed by the age of the owner, funding an IRA, 401K, etc. into a trust would break the tax deferral benefits and could cause immediate taxation. Life Insurance and annuities are based on the life expectancy of the owner, so these insurance policies are largely not funded into trusts. Commonly, retirement plans and life insurance name specific beneficiaries. The living trust can be placed as the beneficiary, in which case, the assets would then be distributed to the trust beneficiaries. The good thing is that since these assets have designated beneficiaries, they are not subject to the probate process and are inherited immediately.

The Bottom Line

Funding is of the utmost importance and should be done immediately upon creating a living trust. Without funding the living trust will not work and will not protect assets. It is a fairly easy task to complete these days and easy to keep up with as assets change over the course of a lifetime.

If you would like to learn more about living trusts, we have an online presentation that in less than 45 minutes will provide you a great overview of everything you would ever want to know about a family living trust. It’s simple and easy to follow, and best of all shows you how you can obtain a very affordable living trust from an experienced attorney at a discount of only $599. There are no hidden fees and notarization is included in that price. To view our informative and educational presentation, click here!