Congratulations! You have just completed one of the most important life tasks available by creating a plan that provides instructions to help ensure that your assets will be distributed, and your children will be cared for according to your wishes following your death.
Studies have shown that roughly six out of ten people do not have a will, trust, or powers of attorney. I must admit, that is (or at least should be) a very scary thought. If you’re in a public place, look around you and pick out any ten people. Go ahead, take a second. Out of those ten, six of them have no will at all, let alone a legally sufficient will. Those six have failed to plan.
It has been said that failing to plan is planning to fail. A major concern is that the “failure” will be experienced by the family and/or loved ones that will be left behind, tasked with managing matters involving probate court. A plan could help them avoid this burden.
You, however, are no longer included among this group.
You discovered that clearly writing your wishes in an appropriate form is a proper approach to avoiding probate court and easing your family’s burden. You have therefore executed a trust agreement, which is the first step in the probate avoidance process. There is, however, a second step that must be taken in order to complete the process. That step involves properly connecting your assets to your trust, also called “Trust Funding.” Let me be more specific: If you imagine your trust as a big bucket, once the bucket is created correctly (I have reviewed “buckets” with cracks and holes in them), the next step is to arrange all of your assets so that they are in your bucket at the time of your death. Any asset that is still in your name at the time of your death will certainly go through probate court, whether or not your bucket was created correctly. It is therefore crucial to fund your trust correctly. For that reason, below I have listed five important factors that will aid you in your trust funding efforts. Let’s begin:
- Transferring your Real Property. One of the major considerations in trust funding involves your residence and other property. In many cases transferring the property into your trust will be the chosen route. In order to accomplish this, you will need a new deed prepared. It will be important to determine which type of deed, and the appropriate timing for the transfer best fits your situation, as some transfers could create additional concerns. Nonetheless, this is a very important decision requiring immediate attention. It will also be very important to communicate information regarding such transfers to your homeowner’s insurance provider in order to avoid any coverage complications. Communicating with your mortgage company will also be necessary to make sure that the transfer does not trigger any issue with your mortgage;
- Life Insurance. Up until the creation of your trust, you have probably listed a relative or friend as the direct beneficiary of your life insurance policy(ies). This may still be appropriate, but it will be very important to determine if your trust should instead be the beneficiary of your insurance(s). If you have minor children, or other beneficiaries with special circumstances, it may be better to name your trust so that the child, for example, does not receive the full value of the insurance in cash at age 18 (Can you imagine getting a six-figure payout at age 18?);
- Retirement Accounts. This can be a little tricky. Similar to life insurance, retirement accounts pay out upon your death via beneficiary designation. The beneficiary could be a child, friend, etc., who will have the option of receiving the full balance of the account upon your death. It may be better to direct a payout into your trust with instructions on distributions to your child, or other relative, over time. While this could create a tax concern generally, your trust can be drafted in a way to avoid such concerns, while maintaining management of the distributions;
- Bank/Credit Union Accounts. Unlike life insurance policies and retirement accounts, bank and credit union accounts can be placed directly into your trust “bucket” during your life, or can be added directly into your trust upon your death. You also have the option of having the account pay directly to a beneficiary. We will discuss which option is best for you in our meeting, but one thing is for sure, you want to choose one option or the other, and your trust should be included in the process in order to avoid probate. Whatever you do, avoid adding someone else to the account as a joint owner for these purposes;
- Business Interests. If you own a business, careful consideration should be taken to determine how, if at all, the business should be connected to your trust. Depending on the type of entity, the trust may need to be adjusted to accommodate the business. If there are other owners of the business, you may first need to create a business succession plan that is agreed upon between you and the partners. In any case, you will need to arrange things in such a way that your interest in the business does not find itself in probate court, or ultimately owned by the wrong person.
As you can see a lot goes into the second step of completing your estate plan, which is trust funding. Don’t worry, though. We will walk you through the entire process and help you make sure that your wishes will be accomplished appropriately and completely. That’s why we’re here!