What Does It Mean to Fund Your Trust?
Have you ever heard a lawyer or financial advisor mention “funding your trust” and wondered what they were talking about? You’re not alone. Trusts are rising in popularity these days, but many people don’t really understand how they work. What is a trust, how does it work, and what does it mean to fund your trust?
What Is a Trust?
Simply put, a trust is a legal entity that is created to hold your property, accounts, or other assets. It allows you to directly choose how those assets are handled and divided, should something happen to you.
We like to describe it as a “suitcase.” You can put various assets in your “suitcase” (i.e., your trust) while you’re alive and carry it along with you. After you die, the person of your choice immediately picks up the “suitcase” and manages the contents of it according to your instructions.
You don’t have to worry about anyone making decisions that go against your wishes – and you don’t have to saddle your family with the headaches and expenses of probate court. Instead, you can set everything up ahead of time, and as long as the trust is properly created and funded, everything should run smoothly.
Creating a Trust
To create a trust in Illinois, it is strongly recommended that you seek the assistance of an experienced estate planning attorney. Trusts are complicated documents and can have far-reaching implications, so it’s important to have yours drawn up by someone who knows what to look for.
First, you’ll want to determine what type of trust you need. There are several to choose from, and each serves a different purpose. This is something that your attorney will discuss with you during your consultation.
Then, you will want to take a detailed inventory of all of your assets. This includes your bank and brokerage accounts, real estate, titled assets such as cars, RVs, or boats, any businesses you may own, and untitled property like jewelry, artwork, and other valuables. As you go through this process, be sure to gather any documentation that may prove ownership.
(Note that there are some assets, like some tax-deferred retirement accounts, that you may not want to put into your trust. Your Diamond Legal attorney can discuss these items with you and advise you properly.)
Lastly, you will want to choose your trustee. Often, you can choose to be your own trustee during your lifetime, but you will want to choose a successor trustee who will step in if you were to become incapacitated or pass away. This could be an adult child, a sibling, or a trusted relative or friend.
After you walk through this process with your attorney, they will get to work creating the documents for you. Once the documents are complete, you simply need to sign and notarize them to put them in place.
Funding Your Trust
Signing your trust documents is not the final step, though!
Let’s go back to the suitcase analogy. An empty suitcase won’t do you much good; it won’t allow you to protect the contents or pass them on to someone else. Likewise, a trust will only protect your assets as long as you place the assets into the trust. We call this process “funding the trust.”
For some assets, like your home or vacation property or a financial account, the process is fairly simple. By retitling the assets into your trust, the trust entity becomes the new owner – and as such, those assets will be managed per the detailed instructions of your trust.
**Note: when you retitle any property into your trust, be sure to let your insurance agent know so that they can update your policies. That way, if something happens, all of your paperwork will be up to date and you won’t have to worry about your insurance declining coverage due to ownership details.
For untitled items such as jewelry, artwork, and other valuables, your attorney can draw up a summary to state which items will be placed in the trust.
What If I Forget to Put an Asset in My Trust?
It’s not uncommon to purchase something (maybe a new car or property) or open a new account and intend to put it in your trust, but forget to do so. In other cases, someone may purchase, open, or inherit the asset soon before their death and not have a chance to put it in the trust. In either case, your attorney can create what is known as a “pour-over will” – a document which states that anything you own at the time of your passing automatically gets transferred into the trust.
It’s important to be aware that the assets covered by a pour-over will may still have to go through probate. However, your intent will be made clear and the process will still be easier and less expensive than if you had no estate plan in place.
What Types of Assets Can Be Used to Fund a Trust?
Funding a trust involves transferring ownership of assets to a legal entity, known as a trust. Understanding what does it mean to fund your trust is essential in the estate planning process to protect assets and ensure they are properly distributed to named beneficiaries upon the grantor’s instructions. The types of assets that can be used to fund a trust include various forms of property and financial accounts.
Real property, such as a personal residence or real estate, can be transferred to a revocable trust or irrevocable trust through a formal title change. This allows the successor trustee to manage the property without going through the probate process, avoiding probate court and keeping the transfer private.
Bank accounts, investment accounts, and brokerage accounts are also commonly used to fund a trust. These assets can provide ongoing financial support for one or more beneficiaries. Personal property, such as valuable art or jewelry, can be included to protect assets and avoid public disclosure in probate court.
Retirement accounts and life insurance policies can be integrated through beneficiary designations, which may offer tax benefits and help reduce estate taxes. Other assets, like LLC operating agreements or partnership agreements, can also be transferred. However, it’s crucial to consult a tax advisor to understand the tax implications and ensure proper transfers, especially if estate taxes or due on sale clauses may apply.In addition, revocable living trusts and irrevocable trusts can hold assets such as trust funds, ensuring that beneficiaries receive distributions per the grantor’s instructions, while helping to minimize tax purposes and probate involvement. Properly funding your trust is key to ensuring your estate plan achieves your intended goals.
Can I Put My Business in My Trust?
Yes – and in fact, we strongly recommend that you do so as a vital part of your succession planning. By doing so, you can ensure that the business you’ve worked so hard to build continues to grow, and the clients you have developed continue to be served according to your wishes.
However, putting your business in a trust also serves another purpose.
If something were to happen to you, would your spouse or adult children know where to look to figure out how to keep things running – and is that really what you would want them to have to focus on while they’re grieving?
By planning for your business succession needs now, you can make sure that the person or team of your choice is ready to take the reins and that your family can put their focus where it needs to be.
Who Is Responsible for Funding My Trust?
You are ultimately responsible for funding your trust. There may be some assets that your attorney will help you manage the process for (such as various types of real estate or your business), but you will need to request most of the assets to be retitled into the trust.
This isn’t a difficult process, and your attorney will walk you through it and answer any questions.
If you have any out of state property (perhaps a vacation home or a piece of real estate), your attorney may be able to help you put those assets in your trust.
Do I Need a Trust?
Good question! There is no single answer to this question, as everyone’s situation is different – but in general, if your net worth is (or will soon be) at or over $100,000, it’s a good idea to protect your assets and your family with a trust.
(Remember that your net worth includes all of your assets – your home, cars, other property, accounts, and business – minus your liabilities or debts.)
If you have any questions or are ready to talk with our estate planning team, give us a call or click below to schedule your free consultation. We’ll take the time to talk with you, ask you the right questions, and create a plan that’s customized to your needs.
DISCLAIMER: Any information contained herein is solely for informational purposes. While it is important that you educate yourself, nothing herein should be construed as legal advice or create an attorney-client relationship. For specific questions, we urge you to contact a local attorney for advice pertaining to your specific legal needs.
