A trust can have powerful effects – protecting assets from long term care costs, safeguarding an estate from loss due to unexpected events, preserving benefits for the disabled, saving probate and legal costs … the list goes on.
But many trusts fail to work as intended.
I know because I see failed trusts all the time. In my experience, there is one reason why a trust fails that is more prevalent than any other reason: it wasn’t properly funded.
A trust manages assets that are in the trust. It cannot manage assets that are not titled in the name of the trust. Therefore, a trust must be funded by having assets titled with the trust as the owner.
Simple concept, but I am constantly amazed at how many people with trusts don’t understand it.
Let me give you a simple example. Suppose Joe wants to avoid probate. He owns a checking account, a stock portfolio, a house, and a vacation home in another state. His son, who would be the executor if Joe had a probate estate, grew up in Pennsylvania where Joe lives, but now lives in Hawaii.
Joe wants to avoid probate for various reasons, including avoiding an ancillary probate proceeding for his out-of-state property, saving his son the inconvenience of having to travel to deal with probate proceedings, and reducing legal fees for his estate.
Joe decides to have a revocable living trust that will own his assets while he is alive. Joe will be the trustee. When he dies, his son will become the trustee and will pay Joe’s debts and taxes before distributing the assets to Joe’s loved ones. Good plan – if done properly, Joe’s estate will avoid probate. His son can probably manage the estate without setting foot in a probate office.
To make his plan work, Joe needs to do two things: (1) create a revocable trust, and (2) fund the trust.
Joe goes to a lawyer to have his revocable trust drawn up. So far so good.
Now comes the next crucial step: funding the trust. Joe needs to go to his bank to have the checking account changed so that the bank records show the trust (not Joe) as the owner. He needs to sign new deeds that transfer ownership of his house and vacation home from Joe to the trust. He also needs to re-title ownership of the stock in the name of the trust.
If Joe does those things, his trust should work as intended.
Recently, I received a call from a new client whose mother had a revocable trust (prepared by another lawyer) when she died. She hired our firm to administer the trust. Then she discovered bank accounts with significant assets that were titled in her mother’s name, not in the name of the trust. So now we will need to administer the trust, and also a probate estate. It would have been better not to have a trust at all.
Unfortunately, situations like that occur all the time.
At Sykes Elder Law, we are committed to making all our trust clients are aware of the importance of trust funding and working with them to make sure each trust we prepare is properly funded.
It’s not that hard to re-title assets in most cases. If you’re going to have a trust, make the commitment to fund it properly.
