Many people set up a revocable, or “living,” trust ("Revocable Trust") to shield assets from probate and take advantage of other benefits, such as (i) the relative privacy of a Revocable Trust rather than a probate proceeding in court, (ii) the management of assets in the event of your own incapacity, and (iii) the ability to provide for the special needs of a physically or mentally disabled beneficiary, including one who is receiving benefits such as Medicaid or SSI. Without properly funding the Revocable Trust, many of the advantages afforded by its creation will be sacrificed. For example, assets held in your sole name at the time of death will be subject to probate.
For the Revocable Trust to be properly administered and to avoid probate, you must transfer assets to it that would otherwise go through probate — a process known as “funding” the trust. We advise our clients to fund their trusts at the time they sign the Revocable Trust and related estate planning documents.
Once your estate plan is complete, however, it’s easy to overlook the need to transfer later-acquired assets to your trust. If you don’t transfer them to your Revocable Trust, those assets may be subject to probate and will be outside the control of the Trustees of the Revocable Trust.
How to transfer assets
Procedures for transferring assets to a trust vary depending on the asset type:
- To transfer real estate, you must execute and record a deed conveying title to the trust.
- Transferring bank and brokerage accounts typically involves providing forms or letters of instruction to the institution holding the accounts.
- Interests in closely held businesses usually require a simple assignment.
- Tangible personal property may require an assignment or bill of sale.
Assets that shouldn’t be transferred
Be aware that certain assets shouldn’t be transferred to a Revocable Trust, such as IRAs and qualified retirement plan accounts. These are “nonprobate” assets, so avoiding probate isn’t an issue, and transferring them to a trust is considered a taxable withdrawal. Instead, you should properly designate beneficiaries of IRAs and other retirement plans. Depending on your own situation, you can name an individual as a beneficiary. Or, if you don’t want an individual to have complete control over the account, you can name a trust as beneficiary. The rules for designating beneficiaries of IRAs and other retirement plans are quite complicated and you should seek advice from your legal and tax advisors about appropriate beneficiary designations.
Likewise, life insurance is a "nonprobate" asset. Therefore, you should make sure to designate both a primary and contingent beneficiaries to receive the proceeds of a life insurance policy. In many cases, your Revocable Trust will be the appropriate beneficiary of a life insurance policy.
Reap the full benefits
Avoiding probate is an important estate planning objective for many individuals because probate can be costly and time-consuming, and its public nature raises privacy concerns.
To ensure that your Revocable Trust is properly funded so you and your beneficiaries can reap the full benefits, we suggest that you contact us anytime you acquire a major asset or periodically to review the funding of your Revocable Trust.