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THE BIGGEST PITFALL IN TRUST FORMATION: FUNDING
Did you know that the biggest problem that I find with trusts is not the language or the format but instead the funding? Having a trust and not funding it is like having no trust at all. Read what the problem is, what it means, how to avoid it and how to fix your unfunded trust here.
(I am an attorney, but I am not your attorney. Nothing in this post constitutes legal advice or creates an attorney-client relationship. This post is merely for informational and educational purposes. Discuss your particular circ*mstances with your attorney in your own jurisdiction.)
THE UNFUNDED TRUST PROBLEM.
Client comes into my office asking for a simple amendment to his trust. He boldly and confidently plops down a giant, gold embossed binder full of complex legal documents between us.
After discussing his wishes and his changes for a few minutes, I ask to review some of the documents. As part of any routine meeting with a client regarding trusts and estate plans, I start asking my client what he owns.
He tells me. He explains to me that the trust will easily and quickly pass those assets to his children without need for probate.
I open the binder and the receipt for the purchase of the enormous, gold embossed legal plan falls out the front. $10,000.00. WHOA! $10,000 for an estate plan! This must be some binder.
I ask him about the firm who prepared the estate plan, how he found them, and the process they used. I discover that he attended a steak dinner, shook hands with a very nice gentleman, and filled his name and personal information on a sheet. Finally, in exchange for a $10,000.00 check, he received a binder full of personalized documents.
Buying an unfunded trust
If you know anything about my approach to trusts, you know that the most important step to forming a trust is funding. But, when I turn to the section of the giant binder that should hold recorded deeds, asset transfers, certifications, and affidavits, I find blank pages.
Instead, I find a long list of instructions written to the client who hasn’t so much as opened that binder since signing it. The instructions recommend that Client take this giant binder and all of its convoluted legal language and “fund the trust.”
No offense to you or to any of my clients, but I have yet to encounter a client who knows what in the world “fund a trust” means.
Now, this giant bundle of paperwork is no better for my client than a paperweight. Without funding the trust, this giant trust and all its ancillary instructions simply push my client back into probate. Now he has no asset protection or personalized planning.
(To read more about why you might want to avoid probate, check this out.)
While the details of the above story are not unique to any individual, I have heard many similar stories. I have many trusts in my office that were formed after a delightful presentation, steak dinner, and charming handshake.
The cost of most of those estate plans makes the hairs on the back of my neck raise. Some prices going up to and including a $10,000 price tag. And, more often than not, once I dig into the trust terms and paperwork, I find that the trust was never funded. No assets ever moved into the trust.
WHAT IS TRUST FUNDING?
Don’t mistake the terms funding a trust with “trust fund.” Attorneys use the word “fund” to describe transferring ownership of certain pre-determined assets to atrust.
Like a business, a trust can own, operate, and manage assets. Like a business owner, a trustee is responsible for managing those assets. The trustee must abibe by the terms of the trust.
A trust is merely the vehicle for governing and ultimately distributing your assets. Most of the time, attorneys use a trust to distribute assets at death.
(To find out whether you might want to consider a trust, check out these practical considerations.)
However, a trust that doesn’t own any assets, never receives any property, and is, thus, never funded is merely an empty shell. (two exceptions to this are a trust that is funded at death by a will –called a testamentary trust– or a trust that is funded by beneficiary transfers)
The vast majority of revocable living trusts, one of the most common forms of trusts, require funding in order to be effective for any of the creator’s purposes.
HOW DO I AVOID HAVING AN UNFUNDED TRUST
Any estate planning attorney worth his or her salt will ensure that any trust you form is also funded. I do not mean that he or she will merely tell you to “go fund your trust.”
No. I mean that he or she will do the leg work to fund your trust. He might contact your investment advisor or prepare deeds and recordings. She might even have you sign assignments of property or transfers of title.
For my clients I even prepare transfers of registration for their business or agricultural vehicles. I never send my clients with their own deeds; I record them myself. And, I always make sure to talk to them about whether or not they even want to transfer their personal property to the trust.
You never know when your great grandmother’s jewelry collection or the classic car in the garage is going to push you above the probate limit. Thus it would defeat an important benefit of having a trust: avoiding probate.
Therefore, in order to avoid having an unfunded trust, meet with a reputable estate planning attorney to complete your trust.
Could I use an online servicer to fund my trust?
If you are already internet savvy, you might be wondering whether you can avoid a whole bunch of attorney fees by going straight to LegalZoom or Mama Bear legal forms. Sure, they sell revocable trusts. Just pay, download, and print. I’m certain that the cost of download is likely far cheaper than the rates of most estate planning attorneys.
Conveniently, they even include the same instructions that were included with my client’s $10,000 trust. “Fund the trust.” Helpful? I think not.
You need to meet one on one with someone who can look at the important and unique aspects of your life: your home and whether you have a mortgage, your business and whether you have a TOD in your operating agreement, your vehicles and determine whether your registrations have been transferred.
Your attorney can listen and react to your personal situation. No online site can provide the same level of analysis that a real live attorney can provide. (That includes this site; see my disclaimer above!)
To avoid the unfunded trust problem in the first place, be sure to consult with a reputable attorney who will walk with you through the funding.
HOW TO FIX AN UNFUNDED TRUST
But, perhaps you are like many clients who come to my office toting this beautifully bound estate plan. Maybe you already have an unfunded trust and need help.
How do you fix the unfunded trust.
In some cases the fix is as simple as changing titles, deeds, registrations, and operating agreements or other business paperwork. In other cases, the damage is much more critical, and you might need an entirely new trust.
Some off-the-shelf trusts are so cumbersome and cookie cutter that no provision in the entire document is tailored to your special needs.
Do you have a farm that needs special provisions for biannual rent? Are any of your family members recipients of state or federal means-tested benefits? Do you have minor children?
If your trust fails to account for some of the most basic of your needs, then it is likely that your attorney will recommend terminating the old trust or decanting it. (Decanting is just a fancy word for transferring an old trust to a new trust.)
At any rate, I have watched the sunken faces of clients as they realize that they have flushed good money. Further, I have waded through mucky probate battles where the trust was never properly funded and thus the subject of long, contentious legal battles.
Neither of these scenarios achieves your objectives, and neither scenario serves you.
Skip the free dinner. Forget about the easy online shortcuts. Instead, take the time to discuss your estate plan, your particular needs, and your unique circ*mstances with a reputable estate planning attorney in your area.
You might find that your goals can be achieved without a trust. What’s more is you might find that your local attorney charges far less for a trust than that online legal site.
DON’T SKIP TRUST FUNDING
You might have the documents; you might have even discussed your estate plan with your family. But, are you absolutely certain that you have avoided one of the biggest failures in the trust world? Funding?
One of the most common problems that I encounter with revocable living trusts is a lack of funding. This is easily identified and fixed. However, as always, I will recommend that you meet with an attorney about your circ*mstances.
If you have any doubts about whether your trust is completely funded, give your attorney a call to confirm.
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