Funding: What Should Ted and Emily Have Done

Written By: The American Academy of Estate Planning Attorneys

When it comes to estate planning, Ted and Emily thought they were ahead of the game. They went to their attorney for help with estate planning and created a Trust to protect their assets. They are in company with about only 21 percent of Americans who also have a Trust. After their lawyer prepared documents, they signed or “executed” their revocable Trust, and both a property and health care power of attorney. They went home, satisfied that they’d taken care of everything they needed to secure their legacies.
The problem is… Ted and Emily didn’t realize that setting up a plan is just the first step. Your Trust is just a treasure chest that is waiting to be filled with the assets it will own. If you don’t follow through with funding it, the assets continue to be owned by you.
This could mean those assets end up being transferred during the probate process (if you have a Will). If you counted on the Trust to transfer your assets and you didn’t account for what will happen to them in your Will, the assets you tried so hard to protect could actually be passed using intestacy laws.

What Happened to Ted and Emily?
Unfortunately, Ted and Emily didn’t realize that they didn’t properly fund their Trust until after Ted passed away. The assets the couple held in joint tenancy passed to Emily. Some assets passed to a beneficiary that had been designated. However, the assets that remained in Ted’s own name had to go through the probate process. This process is public, it’s sometimes difficult, and it can be expensive. It’s also exactly what the couple wanted to avoid!

Funding: What Should Ted and Emily Have Done
Ted and Emily (and anyone else who creates a Trust) needed to follow through with funding their Trust after it had been created.
In general, you should transfer most of your assets into your Trust with the exception of:

• Retirement accounts, such as IRAs, 401(K)s and 403(B)s. Transferring retirement accounts into your Trust can have undesirable tax consequences. However, you may want to make your Trust the designated beneficiary of the accounts.
• UTMA, UGMA accounts and other custodial accounts.
• Life insurance policies. However, life insurance policies may sometimes be put into irrevocable trusts in order to reduce the estate taxes that are due.
• Vehicles: You may want to leave these outside of the trust, depending upon the state where you live.
• Small checking accounts: By keeping a small personal checking account that is not a part of the trust, your day-to-day transactions will be easier and you can keep the existence of the trust private.

Putting your home into your Trust can make it much more difficult to refinance, since most lenders require you to remove it from the Trust before approving a refinance loan. This does not mean that you should not move your home into the Trust, but you should speak with your trusted estate planning attorney first to see if this is a good idea for you, or if other options are available. You should set an appointment to discuss with your estate planning attorney exactly what types of assets you plan to move into your Trust and what the legal steps are that you need to take in order to move them. A good estate planning attorney will help with the process of moving assets (and doing so in a strategic way) so you will be able to reduce tax liability, protect assets, and make the most of the estate plan you have created.