What Your Lawyer Didn’t Tell You about Your Living Trust

A living trust, also known as a revocable trust or a family trust, is a trust you establish during your lifetime.  Most people establish living trusts with several goals in mind, setting forth how they wish their assets to be distributed upon death and avoiding probate.  What many attorneys forget to make clear to their clients, however, is that a Living Trust can only do its job if it is funded. 

What does it mean to fund a trust? Funding is the process of transferring the ownership of your property or changing the beneficiary designations on your property into the name of your trust.  Unless your trust owns your property, it cannot distribute your property to the people and organizations that you named in your trust.  Failure to transfer your property into your trust during your lifetime may mean that the people you intend to have the property never get it.  For example, beneficiary designations which are not changed to the name of the trust will allow the property to be distributed directly to the beneficiary named and will not be subject to your trust.  Other assets which are not transferred to your trust during your lifetime may eventually be transferred to your trust upon death via a pour-over will that your attorney likely prepared for you, but the property will have to go through the delays and expense of the probate process, defeating one of the main reasons why you likely had a trust drafted for you in the first place.

You may be wondering at this point how you literally change the ownership of your property.  First, you need to determine what the legal name of your trust is.  It is usually written on the first page of your trust.  Questions should be directed to the attorney who drafted your trust.

Different financial institutions will have different procedures. Some banks may try to charge a penalty or impose a loss of interest.  You should inquire about these potential issues before the transfer.

If is also important to know when to change the ownership name and when to change the beneficiary designation of property.  For example, with life insurance and annuities you will change the primary beneficiary to your trust. On the other hand, with stocks, bonds and other securities you will need to change the ownership into your trust.  With IRAs and other deferred accounts, there is a debate about whether it is better to name the trust as primary beneficiary or secondary after a loved one.  You should speak to a financial planner about which decision is best.  However, never change the ownership of a tax deferred account to your trust as it may trigger serious tax consequences.

You may need to notify parties ahead of transfers.  If you have a mortgage on your real estate, you should check with your mortgage company before you deed the property into your trust and notify your home owners insurance.  

You may want to wait to transfer ownership to avoid additional costs.  New license tags may be necessary for vehicles you transfer into your trust.  Hence, you may want to wait to re-register your vehicle until your tags are due to expire.

Questions about funding your living trust should be directed to the attorney who drafted the document or another local attorney with estate planning knowledge.