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Funding Your Living Trust
This blog entry explains the vital concept of funding your living trust, including explanation of the process and why it is so important.
What does “funding” mean when it comes to living trust?
In order to understand the concept of funding, imagine your trust as an empty box. In order to avoid probate, we must fill the box with all of your assets, i.e. we must fund your living trust. When you sign your living trust at our office, the box will be empty. So, our job is to both help you fund the living trust for some of your assets and instruct you as to how to fund the remaining assets into the trust box. This process is where attention to detail plays a major role. We provide the details and make it easy for you.
How does a living trust get funded?
The process is relatively straightforward and depends on the types of assets you have. However, the assets that must be funded in your living trust are your titled assets, i.e. real estate, bank accounts, IRA and 401(K) retirement accounts, brokerage accounts, cars, boats and trailers. Basically anything with a title or that is set up as an account with a financial institution.
We also need to fund your personal property…everything not listed above, including furniture, jewelry, tools, clothing. We draft a document that handles this aspect of funding.
How does Legacy Law Center help me with funding my living trust?
Our firm always funds
1. Your home(s) / real property
2. Your personal property
Your home(s) and other real property are funded by the drafting and recording of deeds. We draft the documents, you sign them, we record them, we mail them to you once they are recorded. Done. If you have three homes, we draft and record three deeds. Not a problem.
We also handle the funding of your personal property – everything you own that does not have a title – jewelry, tools, furniture, keepsakes, art, sporting goods, clothing, photos…basically everything in your house.
Your personal property is funded into your living trust with a document that we draft and you sign the day you sign your living trust.
What about funding everything else into my living trust?
For everything else, you will need to do a little bit of legwork. But don’t fret. We will provide detailed instructions on how to fund everything into your living trust, including your retirement accounts (401K / IRA / Roth IRA), regular investment and securities accounts, your bank accounts and any other types of titled assets like certificated stocks, savings bonds, boats / trailers / airplanes. If you have a financial advisor, they can also help you with the instructions and make it easy. If necessary, we’ll call your financial advisor from our office and set up an appointment for you to meet with them to handle the paperwork for those accounts.
And we keep an eye on you after you have signed the documents at our office. We’ll call a couple of months later to see if everything has been funded and the trust box is full with all of your assets. If not, we can help you complete the process. More than likely, however, the trust box will be full and we’ll be congratulating on a job well done.
One of the most confusing things about estate planning is the living trust. For one thing, it can have several different names, including revocable living trust, revocable trust, and sometimes just “trust”. A living trust is called a living trust because it is set up during your life. It is also revocable because you can change the terms at any time, as long as you have capacity.
A living trust is an agreement which lays out provisions by which assets owned by trust are managed, who can manage them and when you die, who gets the assets, if they ever get them at all.
A major selling point (one of many actually) of the living trust is that it can help you avoid probate. Probate is the process by which your assets are administered through the court. It’s a complex, ugly, time consuming and expensive process. Bottomline is something you want to avoid. Ask just about anyone who has ever dealt with the process and they will likely immediately agree and tell you a convoluted story about what a PITA (pain in the ____) it was.
So just how does a living trust help you avoid probate? Well, just having a trust by itself won’t do the trick. To avoid probate with a living trust in Missouri, you need to FUND the trust.
What is funding?
As a concept, think of your trust as a giant box. When you sign your trust, you are going to fund it was something (called a “res”). For my clients, we fund the trust with all of their personal property.
As a concept, think of your trust as a box. Funding the trust is putting all of your assets in the trust box.
In Missouri, a beneficiary deed can be used to put your home into the trust. That document says that when you die, your trust owns the home. Thus, the trustee manages the home and decides whether to sell it, keep it, rent it or whatever is necessary.
Your bank accounts can be re-titled to change from “Bob Smith and Mary Smith” to “The Smith Living Trust Dated _________, 2014”. There are easy methods to transfer the other asses into your trust (IRA, stocks, boats, life insurance). The bottomline is that if you die with a trust that is really an empty box, all of your assets are going to end up in probate.
Legacy Law Center spends a lot of time with clients explaining not only how their trust works, but as you saw above, just as importantly, HOW TO FUND YOUR TRUST.
A fully funded trust will avoid probate and save your family a lot of headaches, time and money.
SIMPLIFIED ESTATE PLANNING
Estate planning in general is pretty complex. However, depending on the needs of a client, it doesn’t necessarily have to be.
I’ve stated before that there are four cornerstones of any estate plan: living trust and/or will, healthcare power of attorney, living will and financial power of attorney.
For a lot of folks, a simple will does just fine. A simple will is generally defined as a will containing no trusts with a standard distribution scheme from the testator (the person making the will).
As an example, if husband and wife have two grown kids, relatively simple assets and husband’s will states that when husband dies, everything goes to wife, unless she has predeceased, then to the children equally, that would be a simple will.
No trust is necessary because there is no concern about estate taxes and simple assets to avoid probate. If the family owns a home, a beneficiary deed can be drafted and recorded to ensure the home avoids probate upon the second spouse’s death.
Powers of attorney are complex documents but in the simplest of explanations allow you to name someone to make healthcare and financial decisions on your behalf if you become incapacitated and cannot do so yourself. These are vitally important documents to have. In the example above, husband would ordinarily name wife to make decisions on his behalf if he was unable to do so, then either or both of his kids as an alternate in the event that wife was not able to do so.
Because simple estate plans have less provisions and less documents, they are easier for an attorney to draft and cheaper to create.
Simplified estate planning is usually not a good fit for families with more assets, combined families due to divorce and re-marriage and families with a history of fighting or where members don’t get along.
Perhaps you have heard that one of the best things about creating a trust is that it helps your estate avoid probate, saving your survivors a lot of money, time and headaches. This is absolutely true.
Yet there are other advantages. One that is often overlooked and which will be the focus of this article is the ability to ensure your children or other beneficiaries do not waste their inheritance.
The best way to explain how we can do this is by example:
John and Judy are in their early 60’s, married, retired and have two college age sons, Jimmy and Jack. Jimmy has always been the life of the party and despite six years of college, has never graduated. He works as a bartender and struggles to pay rent for an apartment. Jack is a little bit older, is married and has two young children. Jack is married to Joan, who is a great mother and a terrific person but is also a spendthrift. Jack makes a good salary, but due to Joan’s spending habits, lives paycheck to paycheck.
John and Judy love their sons and want to split their estate fifty / fifty. However, they are concerned that if Jimmy inherited half of their estate, he would not use the money productively and would probably waste it within a year. As for Jack, they are more concerned about Joan’s spending habits. While the inheritance wouldn’t be legally Joan’s, it would be practically Joan’s since Jack would use the money to support his family and, unfortunately, Joan’s reckless buying.
John and Judy have assets of approximately $750,000. They both have pensions, social security and investment income and live well within their means. They also have long term care insurance to protect their estate from the expense of assisted living and nursing homes. As of now, they have not touched their nest egg and it’s probable that they will leave a sizeable inheritance to their sons.
John and Judy are ideal candidates for a trust. First, they have significant assets. The more assets a person has, the more important it becomes to avoid probate. Second, they have a control issue. That is, they do not want to leave an outright inheritance to their sons due to their concerns about the money being wasted.
The trust for John and Judy works this way: It is a joint revocable trust and they are both co-trustees. Once the first spouse passes away, the second spouse is the sole trustee and has control of all the assets to do as he or she pleases. It’s when the second spouse passes that the control issue for the sons is addressed. John and Judy can go one of two ways. They can either leave half to each son with the condition that each son has to reach a certain age to get a percentage of the money or they can create spendthrift trusts which provide an annual income to each son but also provides that the health, education, maintenance and support of each child is paid for out of that child’s share in the absolute discretion of the trustee. The trustee can either be other relatives, a corporate trustee such as a trust company or a family friend.
The first option is a common choice for many of my clients. One common scheme is to give a child 1/3 of his inheritance when they turn 25, 1/3 when they turn 30 and the final 1/3 when they turn 35. Meanwhile the remaining balance is invested and can grow until the child reaches those ages. Income from growth can either be re-invested and added to principle or distributed to the beneficiary monthly, quarterly or annually.
The second option requires a strong trustee. Under this scenario a beneficiary can request bills be paid and those bills can be paid directly by the trustee or not, depending on the situation. Example: Beneficiary wants to buy a car which has a monthly payment of $400 per month. The trustee cannot pay this but agree to pay a payment which is $300 per month. Either way, the beneficiary is forced to live reasonably. You need a strong trustee who will not bend to persuasive tactics by the beneficiary.
As an additional benefit, holding the funds provides a terrific form of asset protection from creditors of the beneficiaries. As long as the beneficiary has no direct access to the funds and cannot require a distribution, creditors cannot access the funds either.
There are many other benefits to these types of control mechanisms and trusts which are too broad for the scope of this article. Contact our office at (636) 887-5297 for more information or to schedule a free consultation.