Why an Unfunded Trust Is an Expensive Piece of Paper (and How to Fix It)

Many families spend $5,000 or more to set up a trust plan, only to end up in probate court anyway. The reason? They missed the critical second step: funding the trust.

A trust document simply outlines the rules for your assets after you pass away. However, those rules only apply to assets that are actually held in the trust’s name or designated to transfer to the trust upon death. Without taking action to transfer your assets, the trust cannot control them.

Here is how to properly fund your trust across different asset classes:

1. Real Estate

Real estate ownership is defined by a recorded deed. If the deed lists your individual name, the property is not in your trust.

• How to Fund It: Create and record a new deed that transfers the property from your individual name into the name of your trust with your local county.
• The Risk: If left unfunded, your home will likely be funneled through a will, forcing your estate into probate court.

2. Bank and Brokerage Accounts

Bank accounts (checking, savings, money market) and brokerage accounts must be retitled:

• Brokerage Accounts: Financial institutions usually allow you to update the title on existing accounts to your trust without liquidating assets or transferring cash.
• Bank Accounts: FDIC rules often require opening new checking or savings accounts under the trust’s name.
• Alternative: Some individuals avoid opening new operational checking accounts by adding a Payable on Death (POD) beneficiary designation naming the trust.

3. Retirement Accounts & Life Insurance

Retirement accounts (IRAs, 401(k)s) and life insurance policies remain individually owned during your lifetime and use beneficiary designations instead of ownership retitling:

• Life Insurance: Paying life insurance death benefits to a trust provides the trustee with tax-free funds to fulfill trust obligations.
• Retirement Accounts: IRAs and 401(k)s carry significant tax implications and are subject to SECURE Act regulations, such as the 10-year withdrawal rule for most non-spouse beneficiaries. Care must be taken when naming a primary or contingent beneficiary.

4. Business Ownership Interests

If you own an LLC or corporation, ownership is held via membership interests or stock:

• Standard Funding: Assign membership interests or stock directly to the trust.
• S-Corporations & Professional Entities: To maintain specific IRS tax benefits or professional status during your lifetime, you can set business interests to Transfer on Death (TOD) to the trust.

Is Your Trust Funded?

It is essential to know if your trust is funded correctly. For instance,  look at your home’s deed. If it lists your individual name instead of your trust, your estate may still be exposed to probate.

Completing a trust funding checklist typically takes two to six weeks. Consulting an estate planning attorney ensures every asset is properly titled to secure your legacy.

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