Revocable trusts are a very popular and useful estate planning tool. But the trust will be ineffective if you do not actually place your assets into it.
Revocable trusts are an effective way to avoid probate and provide for asset management in the event of incapacity. In addition, revocable trusts, also sometimes known as “living” trusts, are incredibly flexible and can achieve many other goals, including tax, long-term care, and asset protection planning.
However, even if you have signed a beautifully drafted trust, you cannot take advantage of all the trust has to offer if you fail to place your assets into it. The process of retitling your assets into the name of your trust is called "trust funding." If you do not fund your trust, your assets may have to go through a costly probate proceeding or be distributed to beneficiaries you did not intend. Failing to complete your trust funding can undermine your whole estate plan.
When it comes to real estate, bank accounts, or investment accounts, trust funding consists of retitling the assets in the name of the trust as follows:
“[Your Name and Co-Trustee's name] as Trustees of [Trust Name] Revocable Trust created by agreement dated [Date].”
Depending on the institution, you might be able to change the name on an existing account. Otherwise, you will need to open a new account in the name of the trust and then transfer the funds. The financial institution will probably require a copy of the trust, or at least of the first page and the signature page, as well as signatures of all the trustees. As long as you are serving as your own trustee or co-trustee, you can use your Social Security number for the trust. If you are not a trustee, the trust will have to obtain a separate tax identification number and file a separate 1041 tax return each year. You will still be taxed on all of the income and the trust will pay no separate tax.
If you are placing real estate into the trust, you should consult with your attorney to ensure it is done correctly. You should also consult with your attorney before placing life insurance or annuities into a revocable trust. And consult with your attorney before naming the trust as the beneficiary of your IRAs or 401(k) because that could have tax consequences.
Once your trust is fully funded, don't forget about it. When you acquire new assets, you should add them to the trust. A good rule of thumb is to review your trust annually when you do your taxes to make sure everything is titled properly.
For more information about revocable trusts, click here.