Some of the most common questions we receive from estate planning clients are regarding which assets should be owned by or payable to their Revocable Living Trust. The process of transferring assets into a Revocable Living Trust during life or upon death is known as “funding” the Trust. The Revocable Living Trust funding process is a crucial, yet often overlooked, step in the estate planning process. Properly titling and setting up beneficiary designations on your bank accounts, investments, and other assets ensures that if you become incapacitated during life, or pass away, your relatives are able to handle your affairs without initiating a probate court proceeding. Since every estate planning situation is different, if you have specific questions about whether or not your assets are properly held in order to avoid probate, you should consult with your estate planning attorney. With that being said, the following are some general considerations to make when determining ownership and beneficiary designations if your estate plan is complete and includes a Revocable Living Trust Agreement.
How do I fund the Trust?
Funding your Revocable Living Trust is the last step in the estate planning process and it is done after your Revocable Living Trust is executed and in existence. This includes making sure that all of your assets are properly designated so that they will either pass to your Revocable Living Trust or a living beneficiary when you pass away. The key item to remember is that if an asset is owned by an individual and not by their Revocable Living Trust, or their Revocable Living Trust is not the named beneficiary of the asset, that asset will require probate when the individual dies, even if they have a Will and a Trust.
Therefore, it is important that when you meet with your estate planning attorney, you disclose all of your real estate ownership interests, business ownership interests, and the types of accounts in which you hold your liquid and investment assets. At the end of the estate planning process, Williams & Knack, P.C. provides you with a letter detailing the necessary steps to fund your Revocable Living Trust that are tailored to your specific situation, and follows your wishes in terms of how property is to be distributed to your beneficiaries upon your death.
When should I fund the Trust?
The answer is right away, but many people have questions about whether assets need to be owned by their Revocable Living Trust while they are still living. Generally, the answer is typically no, unless your situation includes special circumstances. Remember that properly funding your Revocable Living Trust requires proper beneficiary designations and that does not necessarily mean that there will be any change in account ownership. The instructions our firm provides in the letter referenced above will properly accomplish funding the Trust, but only if they are followed completely and accurately.
Are there any assets that should not be put into the Trust when I die?
The answer to this question depends on your financial and family situation, but generally we do not recommend naming a Revocable Living Trust as a beneficiary of any IRA, 401(k), or other “qualified” retirement funds and annuities. The reason for this recommendation is there are significant income tax advantages to naming your spouse, your adult children, or other persons as the beneficiaries of these types of accounts. A living beneficiary can continue to defer the distribution and withdraw the balance of these accounts slowly over a period of years. The amount they will be required to withdraw is based on certain factors including your age when you die and the beneficiary’s current age, life expectancy, and the beneficiary’s relationship to you as the account owner. Alternatively, if you name your Revocable Living Trust as the beneficiary of this account, when you die, the Trustee will likely be required to liquidate and distribute the funds in the account within five years from the date of your death. The assets in the account will then be taxed all at once, and as a consequence, will be subject to the higher taxation rates for Trusts. Furthermore, the assets will not be able to earn interest, dividends and capital gains, compounding tax free.
Something to keep in mind, however, is that if your situation includes minor children or a special Trust for amenities for a beneficiary with a disability or if it is not your intention to have your beneficiary have complete access to the funds immediately upon your death, this recommendation would not apply to you.
As indicated, funding your Revocable Living Trust is specific to your own personal, family, and financial situation. In addition, if you obtain a new account or a new piece of property, you need to take the steps to fund your Revocable Living Trust (or designate a beneficiary) with those accounts and assets as well. We recommend that you confirm your beneficiary designations at least every few years to make sure that none of your assets will fall to probate. If you have questions regarding funding your Revocable Living Trust and designating beneficiaries, please do not hesitate to contact our office directly.