Don’t Play Games with Your Assets; Revocable Living Trust Funding 101
There are many reasons to create a revocable living trust: probate avoidance, incapacity planning, tax efficiency, and ongoing financial management and asset protection for future beneficiaries, to name a few.
Trust funding is more of an art than a science. “Funding” does not necessarily mean putting money or assets into a Trust NOW, but rather has to do with the process of how and when each asset will make its way into your Trust. Funding strategy is part of a comprehensive estate plan for each and every asset you own, and comes down to your family’s unique situation and your particular goals for estate planning. One universal goal for most estate planning, however, is avoiding a public probate process. Any good funding strategy should avoid probate!
When I talk with clients about trust funding, I bring out Monopoly money, game pieces and three boxes titled:
JOINT ACCOUNT
BENEFICIARY DESIGNATION
TRUST
First, I spread the Monopoly money and pieces on the table. This is all the stuff in your “estate”: everything that is titled in your name. This is the stuff that will have to go through probate if you die.
If I’m talking with a couple, I can often pull some cash and a little plastic house off the table and drop it into the JOINT ACCOUNT box: a joint bank account and a jointly-held home. The assets in the JOINT ACCOUNT box will simply be owned and controlled by the survivor without any probate or trust involvement, so this a good plan for the death of ONE spouse. Sometimes, during the estate planning process, we discover that a marital home is in only one spouse’s name; this means that the other spouse will need to go through probate to obtain ownership over the home. Depending on the reason for having the home in one spouse’s name, we can plan to execute a new deed, put the home in trust, or design some other smooth transition, should the spouse on title die first.
What about the case of a simultaneous death? While this scenario is as dark as it is unlikely, we need to plan for it. In such a case, jointly-held assets won’t help us avoid probate. Fortunately, joint accounts can also have Transfer-on-Death (TOD) or Pay-on-Death (POD) designations in the case of the death of both account owners. To make a TOD or POD, both account owners will generally need to appear in person at the bank. In Michigan, real property can also skip probate if it is transferred to trust now or at the death of the second homeowner, using an instrument called a Ladybird Deed. Thus, JOINT ACCOUNTS also need to have BENEFICIARY DESIGNATIONS in case of a second death.
I then take some more of the Monopoly money off the table and drop it into the BENEFICIARY DESIGNATIONS box. At the very least, retirement accounts and life insurance policies usually have beneficiary designations, but they can be added to most other kinds of financial accounts at large financial institutions. Now that these assets are “off the table,” they are no longer in your probate estate.
Finally, we look at the TRUST box. It is not uncommon for this box to remain empty for a long time, especially if you are young and married and holding assets in joint accounts. For people who have concerns about their ability to take care of themselves for any reason, or for elderly people who are single or widowed, putting all of your assets into the TRUST box immediately can be a great incapacity plan, as a new Trustee can step in to manage your affairs if needed.
Your TRUST box can receive assets in one of three ways:
Title an asset in the name of your Trust, such as a home or an investment account, during your lifetime.
Name your Trust as a beneficiary or contingent beneficiary of your home (Ladybird Deed), retirement accounts, bank or investment accounts, life insurance, etc.
A Judge pours your probate assets into your Trust after your death via your Pour-Over Will. This requires a probate proceeding.
It can sometimes be helpful for clients to play out different scenarios:
For couples, we start by asking: What is in each box now? What is still on the table? What will happen to each asset at the first death (i.e., which box do we want it to move to, and how is it going to get there?), and what happens to it at the second death?
For single people, the analysis is similar, but we are likely not making use of joint accounts.
At Treetown Law, we discuss trust funding in detail, play it out with Monopoly money, and we create personalized diagrams and detailed asset inventories with instructions for every asset. For clients who work with wealth advisors, we communicate directly with them to assist in the funding of assets under their management.
Treetown Law is here to help you every step of the way. Please contact us today to get started!
