Financial Planning

Funding a Revocable Trust

What is a revocable trust?

Revocable trusts, also called “living trusts,” lay out individuals’ wishes for how to manage and distribute their assets. The provisions of such a trust cover the time when the person who creates it (also known as the “donor” or the “grantor”) is alive, as well as periods of incapacity, and after the person’s death.

To establish a revocable trust, you first need to meet with an estate planning attorney, who will then draft the document in accordance with your desired objectives. It is called a revocable trust because you can terminate it at any time before death. During your lifetime, you can easily amend your revocable trust to address changes in needs or circumstances, such as health issues or marital status.

Frequently, as the donor, you also serve as the trustee and therefore have total control over the trust. In the event you become incapacitated or die, those that you name in the document would succeed you in becoming the successor trustee.

Four reasons to fund your revocable trust

While it is possible to create a revocable trust and not fund it, doing so may not take full advantage of the benefits of such a trust. Indeed, there are four key reasons to fund your revocable trust while you can:

  1. Continued management during times of incapacity – A funded revocable trust provides for uninterrupted investment management and access to the trust assets should you become unable to manage your financial affairs. If you become incapacitated without having funded your revocable trust and do not have another plan in place, such as having a designated agent under a power of attorney, your loved ones may need to go to court to obtain the authority necessary to manage your assets — a time-consuming, expensive, and often stressful process. If, however, you have already fully funded your revocable trust, your trustee will have the immediate ability to manage and/or distribute your assets as you have specified in your trust.
  2. Probate avoidance – Another advantage of having a fully funded revocable trust is that it avoids probate, the judicial process whereby a court accepts a will and appoints a personal representative (aka “executor”) to pay final debts and expenses and distribute an individual’s assets. Depending on the state, probate can be expensive and may result in considerable delays. By avoiding these delays, a funded revocable trust provides beneficiaries with more timely access to their distributions. Additionally, because probate is required in each state where you own real estate, if you own real estate in more than one state, retitling your properties to the name of the trust will avoid the additional expense of probate proceedings in multiple states.
  3. Availability of assets – The assets held in a revocable trust are immediately available to cover the costs of estate taxes, administration expenses, debts, and more. If your revocable trust is not funded, your individually owned assets will be frozen upon your death, which means that your creditors and beneficiaries will have to wait for a personal representative to be appointed by a court before necessary expenses can be paid and distributions can be made.
  4. Privacy of estate plan – When a will is filed for probate, it becomes a public document. The probate proceeding involves the disclosure of your designated beneficiaries and, potentially, the nature and extent of your assets. In contrast, when a funded revocable trust is involved, because your assets transfer outside the judicial process, none of this information is made available to the courts or to the public.

What does funding a revocable trust entail?

Funding a revocable trust involves transferring assets from the donor’s individual name to the name of the trust. In the case of some assets, this is done by transferring ownership and/or re-registering assets in the name of the trust. In the case of other assets, you will want to designate the trust as a beneficiary of the asset. See the inset box for how to fund your trust with some of the most common assets.

Note: The following guide applies to individually owned assets. Joint assets typically transfer by operation of law upon the death of the first joint owner. For those assets that transfer by beneficiary designation, such as retirement accounts and life insurance, you will want to consult with your estate planning attorney to discuss the tax implications of your retirement plan beneficiary designations, in particular, and to ensure all designations are aligned with your overall estate plan.

How to Fund Your Revocable Trust

People often mistakenly assume that if they have hired an attorney to draft a revocable trust document, the attorney will take care of funding the trust. That is not always the case.It is important to have a clear discussion with your attorney about who will be responsible for retitling which assets.

  • Investment and Bank accounts: This typically involves opening a new account owned by the trust, transferring funds from the existing account into the new one, and closing the original account.
  • Real estate: Have your attorney prepare a deed to transfer ownership to the trust.
  • Titled property (boat, car, motorcycle, air-plane, etc.): Consult your attorney to see if this step is appropriate based on the laws of your state. In those states where it would in-deed be beneficial to take this step, you will need to transfer ownership to the trust and obtain a new title showing the trust as the owner. The trust may then need to re-register the vehicle with the proper licensing authority.
  • Untitled property (clothing, furniture, electronics, jewelry, etc.): Create a signed and dated document, such as an Assignment of Property or Bill of Sale, designating the trust as the owner. The document can refer to broad categories such as “electronics” or“furniture,” but should list particularly valuable items, such as jewelry, art, and antiques, individually.

To recap, a revocable trust controls only the assets you put into it. Therefore, if you establish a revocable trust but do not fund it, you will not have uninterrupted access to your assets should you become incapacitated, you will not avoid probate, and your assets will not be immediately available to your beneficiaries. Though the funding process may seem burdensome, it is crucial to take the time and energy to fund your revocable trust while you are still capable of doing so. HM Payson is here to help you navigate this process for the assets we manage on your behalf.

This newsletter is intended for educational purposes only. For financial planning advice specific to your needs or for further information, please consult your portfolio manager

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