“A Friendly Reminder to Our Clients – Funding Your Trust” by Emily J. Kembell
Most of our estate planning clients ultimately select a revocable trust agreement as the primary document to dispose of their assets. One of the main reasons they use a Trust, rather than a Will, for disposition of their assets upon death is to avoid probate. Probate is public, costly and time-consuming, and it can be easily avoided if assets are held in Trust at death. This means that the assets must either be titled in the name of the Trustee or the Trust prior to death or, alternatively, transferred at the moment of death by operation of law (e.g., a Pay-On-Death beneficiary designation).
Trust funding begins at the signing of the revocable trust agreement in order for a Trust to be effective. Missouri law requires a Trust, to be effective, must hold an asset at inception. Accordingly, some asset, large or small, must be titled in the name of the Trustee or the Trust immediately after the Trust is signed. Otherwise, the Trust may be invalid.
As soon as our clients sign their revocable trust agreement, we also advise them of the necessity of identifying all of their currently owned assets and then either transferring ownership to their Trust or, arranging for transfer of their assets to Trust by beneficiary designation upon death. In addition to initially funding the Trust, it is also imperative to maintain the Trust – that is, ensuring that newly acquired assets are also titled in the name of the Trustee or the Trust.
The result of failing to properly structure the ownership or beneficiary designations is that such assets will not accomplish our probate avoidance objective. In addition, failure to properly fund your Trust may result in a loss of the estate tax savings objectives. For example, in order to take advantage of both spouse’s unified credit amounts, a revocable trust agreement often creates a Marital Trust and a Credit Shelter Trust at the first spouse’s death. If there are not enough assets held in Trust at the first spouse’s death, then the Credit Shelter Trust will not be fully funded, resulting in a waste of the first spouse’s unified credit. Ultimately, more estate tax could be due at the second spouse’s death as a result.
We encourage our clients to work with their financial advisors on trust funding. Clients’ financial advisors are quite helpful in titling assets in Trust. It is important to remember that qualified retirement accounts often need to be treated differently in order to take advantage of the special income tax rules applicable to those assets.
To ensure that your Trust is properly funded, we encourage you to look at your assets and ensure they are properly held in Trust. If you have any questions on trust funding, please contact a member of the CECB Estate Planning Practice Group.