What Is Funding a Trust?
Funding a trust is the process of transferring your assets into the ownership of your trust. The trustee will have control of these assets when ownership has been transferred.
Key Takeaways
Funding a trust is the process of transferring your assets into the ownership of your trust. How it works will depend on the type of property.
Assets that are titled in the settlor’s name or in joint names with others are retitled into the name of the settlor’s revocable living trust. The trust can be designated as the primary or secondary beneficiary for assets that require a beneficiary designation.
The trustee will have control of these assets after ownership has been transferred.
Properly funding a trust ensures that your assets can be controlled by your named trustee and go to the correct beneficiary. They don’t have to go through probate after your death.
Definition and Example of Funding a Trust
Funding a trust refers to moving ownership of assets that are titled in the settlor’s name or in joint names with others. It retitles them into the name of the settlor’s living trust. It can also involve taking assets that require a beneficiary designation and naming the trust as the primary or secondary beneficiary of those assets.
The person who creates and funds a revocable living trust can be referred to as the “settlor,” “grantor,” “trustmaker,” or “trustor.” Settlors may also choose to designate themselves as trustees or beneficiaries of their revocable trust, depending on the reasons for the trust.
Note
These rules all apply to a revocable living trust. The settlor can’t act as trustee of an irrevocable trust and, as the name suggests, has no legal right to take assets back after they’ve been funded into the trust. That isn’t the case with revocable trusts.
Funding a revocable living trust ensures that the settlor’s property is governed by the terms of the trust agreement. The selected successor trustee will be able to manage accounts held in the name of the trust if the settlor becomes incapacitated. The successor trustee will be able to manage and transfer accounts held in the name of the trust to the ultimate beneficiaries named in the trust agreement after the settlor’s death.
How Funding a Trust Works
It’s not enough for the trustmaker to simply sign the trust agreement and expect that the revocable living trust will function properly. The settlor must “fund” their assets into the trust after the agreement has been signed. The trust is just a useless, empty vessel otherwise.
Funding a trust involves transferring property into it. How this works will depend on the type of property you’re transferring. You can transfer ownership of some assets to the trust. You may have to designate the trust as a beneficiary for others.
Titled property, such as a boat, car, motorcycle, or airplane, can be transferred by establishing a new title naming the living trust as the owner.2 Untitled property, like jewelry and collectibles, can be moved by creating a signed and dated document called an “assignment of property.” The document designates the trust as the owner.
Note
Untitled property can often be listed in an ownership document as broad categories of “electronics” or “furniture.” These should be listed individually, however, if you’re transferring particularly valuable items, such as jewelry or art.
Some other assets that are commonly funded into a trust include:
Bank accounts: These can vary by bank. Transferring them may involve closing an account and transferring the funds to a new account owned by the trust.
Certificates of deposit (CDs): Wait until the CD matures, then open a new CD in the trust’s name to avoid early-withdrawal penalties.
Securities: Funding a trust with stocks, bonds, and brokerage accounts can vary by brokerage and by the type of security. Stock and bond certificates may have to be reissued with the trust as the owner. Ask your broker how to transfer ownership of these assets.
Real estate: You can transfer ownership of real estate using a quitclaim deed. You may need permission to do so if you have a mortgage or belong to a homeowners’ association.
Note
Your county or city may have additional paperwork you must fill out to legally transfer real estate ownership to your trust.
Business interests: Shares in partnerships, LLCs, and corporations can be retitled in the name of the trust.
Life insurance, retirement accounts, health savings accounts (HSAs), and medical savings accounts (MSAs): Designate the trust as the beneficiary for each account or policy.
Speak with your lawyer or the institution that holds the asset, such as your bank or broker, if you’re unsure how to transfer ownership of any property to your trust.
Your assets are protected from probate once they’re owned by the trust. They’re under the control of the trust and any trustees you’ve named.
Do I Need to Fund a Trust?
Funding it is a critical step in the process of creating a revocable living trust. An unfunded trust is not worth much more than the paper it’s written on. It’s important to take the time to retitle your assets after you’ve taken the time to work with your estate planning attorney to create a revocable living trust that fits your particular family situation and financial needs.
Note
Failing to fund a trust properly can create several long-term difficulties.
Assets Can’t Be Managed by Your Trustee
The trustee of a revocable living trust has no power whatsoever over any of the settlor’s property that hasn’t been retitled in the name of the trust. Your loved ones may have to establish a court-supervised guardianship or conservatorship to manage any assets that aren’t held in the name of the trust if you create a trust without funding it, and then become mentally incapacitated.
It’s also vitally important to name a successor trustee to take over management of the trust for you in this case if you’ve personally been acting as trustee and are no longer mentally capable of doing so.4
Assets May Have to Go Through Probate
Any property that hasn’t been retitled into the name of your revocable living trust may have to go through probate after your death. That defeats one of the main benefits of creating a revocable living trust.5
Assets May Not Go to Your Intended Beneficiaries
Property that’s held outside of your revocable living trust can’t be disposed of or passed on to beneficiaries after your death as you’ve provided in the terms of your trust agreement. Assets held outside of your trust may pass by intestate succession if you don’t also leave a will for assets that haven’t been funded into your trust. Funding your trust ensures that your assets will go where you want them to go.
What Assets Can Go Into a Revocable Living Trust?
Once established, you must “fund” your trust. Financing requires a title change to pass assets into the trust’s ownership.
As you acquire more assets, you may want to transfer additional property to the trust, and you can. You can also remove assets at any time and take them back into your possession.
Some assets are more appropriate for funding into a trust than others.
Cash Accounts
Cash accounts include checking, savings, money markets, and CDs. These can all be funded into a revocable living trust, but be careful with CDs. Your bank might consider the retitling of a CD into a revocable living trust as an early withdrawal of the funds, incurring penalties. You’ll have to wait until the CD matures before retitling it in this case.
Non-Retirement Investment and Brokerage Accounts
Non-retirement investment and brokerage accounts include assets held in an account in your name, as well as in joint names with others or as tenants in common. They do not include accounts held in qualified plans such as a 401(k), 403(b), IRA, or qualified annuities.
A change of title will result in negative income tax consequences with these types of accounts. They require a change of beneficiary into the name of the trust rather than a change of title. They would remain outside your trust during your lifetime, then be paid to your trust at your death.
Non-qualified Annuities
Non-qualified annuities can be retitled into the name of your revocable living trust, and your trust can also be designated as the primary or secondary beneficiary of the annuity. You can handle this one either way.
Stocks and Bonds Held in Certificate Form
The original certificate must be returned to the stock transfer agent in exchange for a new certificate if you’re going to fund it into your trust. This requires obtaining a “Medallion Signature Guarantee” on the stock transfer form and mailing the original certificates via registered mail.4 You must insure the shares for 2% of their current fair market value.
Consider depositing your certificates into a brokerage account that’s titled in the name of your revocable living trust rather than go through all this.
Tangible Personal Property
Tangible personal property includes personal effects such as jewelry, clothing, books, personal papers, personal computers, and household goods such as furniture and furnishings, antiques, collectibles, or artwork. It can include motor vehicles, boats, airplanes, firearms, pets, horses, cattle, and tools.
Consult with an attorney about the possibility of creating a pour-over will to have your executor transfer your vehicle and other tangible personal property into your trust at the time of your death. This would still require probate, but the probate process should be a much simpler affair if it involves just a few assets moving into your trust, and the alternative could be more of a headache.6
For example, a motor vehicle titled in an individual’s name can’t be transferred without probate in some states, so you could run into a problem here.
Additionally, it could act as something of a red flag for litigation-hungry individuals should your vehicle be involved in an auto accident. Having your auto title in the name of a living trust signals untold wealth that could potentially be recovered should the other party file a lawsuit, even if that’s far from the actual case.
business interests
Business interests include shares of stock in a closely held corporation, general and limited partnership interests, and membership interests in limited liability companies.
Partnership ownership certificates must usually name your trust. As for closely-held corporations, you can generally just retitle the stock in your trust’s name. Limited liability companies can require the consent of some or all of the other owners.
Check any shareholders’ agreements, partnership agreements, or operating agreements for restrictions on transfers, as well as for specific procedures that must be followed to retitle your shares or interests into the name of your revocable living trust.
Life Insurance
Changing the ownership of your life insurance policy to your revocable living trust gives your successor trustee the legal authority to deal with the policy, including borrowing against its cash value to pay for your care if you should become mentally incapacitated.
Be careful in states that offer creditor protection for the cash value of life insurance because some states only offer protection for policies owned by “individual” residents of the state. The cash value would become unprotected because the trust isn’t an individual.
One alternative, in this case, would be to give power of attorney to your successor trustee instead so they can manage your life insurance if need be.
Monies Owed to You
Monies owed include both secured and unsecured personal loans that you’ve made to others, such as a mortgage you hold on someone else’s real estate. It’s usually advisable to redraft any agreements to name the trust as the current lender.
Oil, Gas and Mineral Rights
Retitling your interest in gas, oil, or mineral rights into your revocable living trust will generally require either an assignment or a new deed. It depends on the type of ownership interest that you have.
real estate
Frequently Asked Questions (FAQs)
How do I name a trust as my beneficiary?
If you have established a trust, you can designate it as a beneficiary on your accounts in the same way you would name a person. For example, on your life insurance policy, you would list the trust as your beneficiary rather than a relative or friend. After your death, the payout from your life insurance would be automatically funded into the trust rather than going to a person.
Do I need a will if I have a trust?
Even if most of your assets are funded into a trust, you should still have a will. It will designate recipients for any assets not funded into the trust, establish the person with your medical and financial power of attorney, name guardians for any minor children, and otherwise express your wishes. If you don’t have a will, assets, guardianship, and power of attorney may all be assigned by the state, and you won’t have any say in who is chosen.