Posts Tagged ‘funding revocable living trusts’

Should I tell my insurance agent that my house is going into my trust?

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Yes indeed. You need to contact your insurance agent to discuss how your trust owned real estate is covered in the event of loss. Your property insurance agent can help you figure out how the trust ownership should be reflected on your policy.

Here is the back story on this:

People use revocable living trusts in an estate plans all of the time. This is because a revocable living trust can keep a person’s assets out of probate. A revocable living trust can also be used to feather money to minors or to adults that need to be protected, keep your affairs private after death, and decrease cost while adding efficiency in distribution to your heirs after death.

If you choose to use a revocable trust in your estate plan, you will likely go on a mission to “Fund” it after you form it.  “Funding” a trust is a fancy way of saying that you will transfer ownership of your assets into the trust or change the named beneficiary to the trust. You do those things so that your assets are held in the trust  vs. going through the probate process when you die.

Your real estate is an asset the goes into your trust during the “Funding Process”.  You can accomplish this by signing a quit claim deed that states you are changing the ownership of your real estate from you to your revocable living trust.  You would then filed that deed with the Register of Deeds.

The Rub:

The real estate that you plan to transfer into your trust is covered by property insurance. If you leave the property insurance policy in your name alone without adding the trust in some way, the property insurance policy may not pay if you have a loss.  In short, the insurance company could avoid paying if the “owner” of the house is not an “insured party” on the policy.

The Answer:

You should contact your property insurance agent to determine how the trust ownership should be reflected on your policy. It is something that insurance companies see regularly, but the necessary adjustment does not happen without your reaching out to the company.

Discussing this with some of my insurance agent friends, here is what I have learned about it. They suggest that you should continue your property insurance coverage in your name – just like you had before you developed your trust.  Then, along with that, add the name the revocable living trust as an “additional insured” on the policy.

When your revocable living trust is added as an “additional insured” to your insurance policy, you still get the liability coverage and personal property protection for the contents of your home. The trust, on the other hand, is also protected against liability and casualty issues that occur with the property.

Revocable Living Trusts: Are We Funded Yet?

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The Review

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.

The Surprise

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.

The Fix

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.