Trusts and assets: Getting it all in there
July 1, 2023 | View PDF
Some years ago I had a meeting with a woman who had created a trust, using another lawyer, a few years earlier. She had questions about the trust, which I was able to answer, and it turned out that it still did what she wanted.
But when I asked her whether everything was in the trust that needed to be, she looked puzzled. So I turned to my computer and pulled up the property records. Both her home, and her rental property, were still in her own name. As were, apparently, all of her accounts and other assets. Nothing was in the trust.
I asked her why she had not put anything into the trust, and she said, “I didn’t know anything about that.”
I then asked her whether her attorney had not said something about funding the trust, and she said, “Is that what that means? Because when I left the other attorney’s office after I signed everything, the last thing she said was ‘don’t forget to fund your trust’. But she never told me what funding the trust meant”.
I think I may have audibly groaned at that point. If you are going to have a living trust, you need to put your assets into the trust. That is called “funding the trust,” and it is absolutely essential.
At this point some of you are probably asking, “Why? I have a will, and I didn’t have to fund my will”. Well, a will is a very different animal from a living trust.
A will (or “last will and testament”) is your final instructions to the probate court, whereas a trust is a separate entity that holds assets while you are alive. A will doesn’t hold any assets. When you die, any assets that belong to you, in your own name, have to go through probate court. Your will tells the judge who you want to have appointed as your executor, and who the executor should give those assets to at the end of the process. The executor files a bunch of paperwork with the probate court, and then the judge signs an order called “letters testamentary,” which authorizes your executor to transfer assets. And once the executor jumps through all of the necessary legal hoops, such as publishing notice to creditors, the executor distributes the assets according to the will, and reports back to the judge.
A trust is a very different thing. When you sign a living trust, you are creating an entity. It is a legal thing, the same way, for instance, a corporation or an LLC is a legal thing. In the trust document—it is usually called a declaration or agreement of trust—you say who will manage the assets of the trust, and who those assets go to when you are gone. In a typical trust, you will declare that you will manage the assets yourself and that, while you’re alive, you can do anything you want with them.
But the rules of the trust only apply to the assets that are in the trust. When you first create that trust, it doesn’t have any assets in it. To make the whole thing work, you have to transfer the assets into the name of the trust.
How you put the assets into the trust depends on what kind of assets they are. If it is real estate, you record a quitclaim deed to put the property into the trust. A bank or brokerage account can be transferred to the trust directly, or you can designate the trust as the pay-on-death beneficiary. For ordinary stuff like furniture, jewelry, tools and artwork, you just have to sign something saying you have put those items into the trust. And there are special procedures for vehicles, boats, airplanes, firearms, savings bonds and a lot of other things.
What happens if you don’t do that? The assets that could have been transferred through the trust end up going through the probate court. That is unfortunate, because chances are one of the reasons you created a living trust, was to avoid probate. Having to go through probate costs money, delays distribution, and can lead to all sorts of undesirable consequences.
General Patton once said (and I don’t know if this was in real life, or just in the movie) that the reason he refused to retreat was that he did not like to pay for the same piece of real estate twice. A living trust costs money, a lot more than a simple will. It can save your heirs a lot more money (and time) on the back end by keeping your estate out of probate. But if you don’t fund the trust, you will have paid good money for the trust, and then your estate will have to pay even more money for probate.
And that, my friends, is paying for the same real estate twice.
Kenneth Kirk is an Anchorage estate planning lawyer. Nothing in this article should be taken as legal advice for a specific situation; for specific advice you should consult a professional who can take all the facts into account. ‘And then you can let the other poor, dumb son-of-a-gun pay for his probate,’ as General Patton may have said.