Far too often, when I review prospective clients’ trust documents and financial statements, I find that their accounts haven’t been titled in the name of the trust they created.
Did they mistakenly believe that simply by having a trust, their assets would be distributed accordingly? Could it be that their estate planning attorney never informed them that they needed to fund the trust? Or is it that they received those instructions but never got around to doing so?
In my experience, all three are possibilities that can contribute to a costly, yet preventable, error.
Creating a trust is only the first step in the process; it also must be funded. To fund a living trust is to transfer property to the trust – either by giving the trust ownership or, in some cases, by designating the trust as a beneficiary.
So, what can be done if you have a trust and aren’t sure if it has been funded? Here are some steps to take:
1. Check all the deeds on your real estate holdings.
If you have a primary residence, vacation home, timeshare and/or rental property, you’ll want to confirm that these assets are in the name of your trust. In many cases, the estate planning firm that drafted your trust will take care of the transfer for you. Still, it’s important to be sure everything is in order.
If, for example, you refinanced your home at some point, your lender may have required you to remove the name of the trust for financing purposes. And all too often when this happens, the homeowner forgets to change the deed back into the name of the trust. In some cases, the estate planning firm might not have handled the recording of the deed, or maybe there was an error in processing. All your deeds should be checked to confirm they are in the name of your trust.
2. Review your financial statements.
Gather any bank and investment/brokerage statements that are not part of an IRA or retirement plan and confirm that each of these accounts has your trust listed as the owner. Generally, you can confirm this by either calling the institution or reviewing the titling on your statements. If you look at your statement and notice there isn’t any reference to the trust, it’s likely that it hasn’t been accurately recorded.
3. Examine your annuity and life insurance policies.
Verify the parties to these contracts: the insured/annuitant, owner, and primary and contingent beneficiaries. In these types of policies, you’ll be able to name a primary and contingent beneficiary directly with the company. In most cases, I encourage clients to list the trust as primary or contingent beneficiary on their life insurance policies. (Sometimes, it makes sense to list a spouse as the primary beneficiary and the trust as the contingent beneficiary to more efficiently distribute the funds to a surviving spouse.)
The rules surrounding annuity beneficiaries were changed a few years ago, so in this particular area, I advise consulting a financial or tax professional who has experience in this environment. Don’t assume that naming the trust as primary beneficiary will achieve your estate planning and tax planning goals.
4. Address IRAs and other retirement plans separately.
IRAs and retirement plans must be treated on a stand-alone basis when determining whether a trust should be listed as a primary or contingent beneficiary. Listing a trust as a beneficiary in many cases accelerates the income tax due on the inherited IRA or retirement plan. Having the trust listed as beneficiary can also limit the flexibility in how distributions are made to the trust beneficiaries versus naming those same individuals directly as beneficiaries. The primary reason for listing a trust as a beneficiary to an IRA or retirement plan is to protect that asset from creditors, a spendthrift, or perhaps due to a special needs beneficiary. This is where working with an experienced specialist could save you from making an expensive mistake.
Confirming that your assets are in your trust takes very little time and no money. Don’t assume that your estate planning attorney has taken care of this issue. In most cases, the firm that handled creating your trust document will only change ownership on real estate located in the state in which its attorneys are licensed to practice law. A firm often will produce letters of instruction as part of their services, but that doesn’t mean it will actually handle the funding of your trust.
If you have a trust and haven’t conducted a funding audit, you may be putting your family in jeopardy of heading to probate court. Delays could occur at your death or incapacity if the assets aren’t in the trust. Remember, assets don’t just move automatically into a trust — they have to be put there.
Kim Franke-Folstad contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Michael Clark is an independent Investment Adviser Representative, Certified Financial Planner and owner of Ensemble Wealth Management (www.ensemblewm.com (opens in new tab)). He has more than 25 years of experience in the financial and retirement planning industry and is licensed in securities, insurance and real estate services.
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