Revocable Trusts and Funding Your Trust

A revocable living trust or revocable trust is a form of "will substitute" that effectively can avoid the costly and very public probate process. The revocable living trust also serves as a receptacle for any assets that are not owned by the trust at your death, and may be the most significant document in your estate plan. If you are married, your trust may contain separate provisions for funding a so-called "credit bypass" trust (also known as a "Family Trust"), which will allow you to take advantage of the current lifetime exclusion from your estate of $5,000,000 (in 2011 and 2012). The trust also may provide for a separate "marital" deduction gift or trust to minimize taxation on the death of the first spouse.

The revocable trust also can be drafted to permit specific bequests of money or other property to your heirs, friends and family, or charity, or to accomplish myriad other goals.

To create a "funded" revocable trust, you will need to re-title certain assets currently held in your individual or joint names into the names of the two trusts. You should try to ensure that all of your assets (except perhaps your house, which we understand is owned as joint tenants or tenants by the entireties) are owned by the revocable living trusts to avoid the very costly and public probate process in Virginia.

Funding Your Revocable Trust

You may decide to use a revocable living trust instead of relying on a will or joint ownership or some other form of property ownership in your estate planning. Revocable living trusts may provide significant cost and time savings for your heirs. In addition, living trusts may provide significant benefits in the event of your incapacity and portability if you are moving from state to state.

Just preparing these trusts is not enough. You actually need to put your assets in the trusts. This is known as "funding" your trusts. Many people forget this critical step.

What Is "Funding" My Trust?

Funding your trust is transferring ownership of your assets from you to your trust. You physically change the titles of your assets from your individual name (or joint names, if married) to the trustee of your trust. You also will change the beneficiaries' designations on life insurance, retirement assets and other types of assets to your trustee. In the case of living trusts, you typically will be your own trustee so the change in ownership will be simple and won't have any adverse affect on you.

Who Controls The Assets In My Living Trust?

The trustee of your living trust will control the assets in your trust. Typically, you will name yourself as trustee of your own living trust. In that case, you will have complete control over the assets in your trust. As a result, you will be able to buy, sell and transfer assets in the same manner as you currently have the ability to do so. You can also add or remove assets to your living trust at any time while you are serving as trustee.

Why Do I Need To Fund My Trust?

If you have gone to the expense and effort of having revocable living trusts prepared, but haven't changed the title to your assets or the beneficiary designations, your assets will still go through the probate process. This process (depending upon the state) entails preparation of inventories and annual accountings, among other things, that may result in significant costs and time delays to your heirs. In addition, the probate process generally is a public one, giving anyone the ability to see the assets you owned at your death. So, if you have drafted your trust but have not funded it, it will not control anything until your death, in which case all of your assets will still go through the probate process or will not pass according to your wishes as set forth in the trust. In other words, fund your trust now, rather than having a court do so later.

What If I Forget To Transfer Assets To My Trust?

To accompany the trust, you will need a "pour over will" that causes any forgotten assets to pour over or be transferred into your trust at your death. While this does not avoid probate, it at least ensures the assets will pass under your trust and in accordance with your wishes.

Is The Funding Process Difficult?

The funding process is not difficult, but it can be time-consuming and detail-driven. In fact, living trusts are now so commonly used that most banks, investment brokerages, title companies and real estate companies understand how the funding process works and generally will be cooperative in assisting you in transferring assets to your trusts.

In some cases, the institution will want evidence that your trust exists. In Virginia, we can use a "certificate of trust" to provide this evidence. Many institutions have not modernized their compliance systems to accept certificates of trust, so they may request copies of portions or all of your trust. It usually is unnecessary to provide a copy of the entire trust to an institution, although some may request this for their files. The certificate of trust is a simple one-page document that verifies the trust's existence, explains the powers given to the trustee(s), identifies the trustees and may include certain other information without revealing private information that may be included in the trust instrument.

Moreover, when you refinance your mortgage on residential real estate, many lenders require that you take the real estate out of the trust before you can qualify for their refinancing program.  While this is unnecessary from a legal standpoint, the lenders can be intransigent on this point.  If you take the property out of the trust, it is relatively easy to put it back in.