We recently had a new client present us with her revocable living trust so that we could review it for her. We took a good look.
The trust had a beautiful binder cover on it. It was drafted by a reputable attorney. It was carefully worded. It contained special language in it so that the trustee could take care of her if she became disabled. It contained language delaying large payments to minors until, one would hope, they reach an age when they are able to grasp money management. It also had a provision in it that would pay a residual distribution to a nice local non-profit group.
The trust looked great so far.
We then asked our client a critical two-part question that is a standard part of our trust review process. What assets had she put into the trust so far and how is the trust to be funded upon her death? She could not recall.
We then took a look at a few of her assets to see whether she changed titles and beneficiary designations into the name of the trust.
- Life insurance? No. Still had her deceased spouse named as beneficiary.
- Bank accounts? No. Still in her name, no trust as the owner or beneficiary.
- Her vintage car? No.
- Her farmette? Not a chance. It was still in her name.
We quickly realized that a very important step in trust planning was not accomplished. She had no assets in her trust. No assets were set up to go into her trust outside of the probate process. In short: She failed to properly fund the well-crafted trust she paid for.
Why It Matters
A revocable living trust can only control the assets that are put into it. Think of a revocable living trust as a legal container. The container is filled and then, at certain points along a timeline, its contents (some or all) can be distributed.
How Do I Fund These Things?
Trusts can be filled in various ways and at various points in time after they are drafted for a client. One way to accomplish this funding is through non-probate methods. Some examples of non-probate funding include taking actions, such as:
- Deeding your house from you to the trust.
- Transferring other assets outright to the trust using a bill of sale.
- Placing the trust in as your beneficiary on accounts, policies and contracts.
These transfers all occur without the need for probate. The trust then administers the assets under its terms outside of probate. In short, the trust can help to avoid the delays and expenses of the probate process.
Finally, as a safety valve, the funding can occur after death and through probate via a last will that names the trust as beneficiary. This kind of will is commonly called a pour-over will. This is a probate method of funding. While it does cause the asset to make their way into the trust, it is only after the assets (if above $50,000 in Wisconsin) are probated.
In our case, our client had a good trust prepared and a pour-over will. The trust was not filled with the assets in a manner that avoids probate. It appeared to be destined to remain empty until after a probate filled it. If the goal of her living trust is to avoid probate at death and court intervention at incapacity, then she should fund it now, while she is able to do so. If she fails to do so, the wording in the trust and the trust itself could be irrelevant when she becomes disabled or dies. If she relies on the pour-over will for the asset transfer, the money may not go to her minor grandchildren in the way intended under the trust, but instead to lawyers, court fees and other places that were unintended. The charity could have been out of luck if the residuary money was spent in the probate process.
If you have signed your living trust document but haven’t changed titles and beneficiary designations, you should get to it. Luckily, we caught the issue in our case. We made sure our client’s trust was properly funded.
Be sure and ask your attorney how to fund your revocable living trust. There is no doubt that you and your heirs will be glad you finished what was started.