Trusts are popular estate planning tools for many reasons, including the fact that they help avoid probate and they provide some asset protection. Depending on the size and nature of your estate, creating a trust can be complicated. However, your estate planning attorney can help you with the details. One of the most important steps in creating a trust is funding that trust.
What is a trust?
A trust is a fiduciary agreement between the trustee and the grantor. Fiduciary just means an agreement based on confidence and trust. The trust agreement authorizes the trustee to obtain and manage all of your trust assets on behalf of your named beneficiaries. The trust agreement also provides specific instructions regarding the management and distribution of your assets.
The basic steps in creating a trust
Once you have decided to include a trust in your overall estate plan, here are the basic steps that must be followed in creating a trust. The basic steps to create any trust are as follows:
- Choose the assets you want to include in the trust
- Choose your trustee
- Choose your beneficiaries
- Draft your trust agreement
- Fund your trust
The most important thing to remember is, once you execute the trust agreement, you must fund your trust. If you do not, your assets will become subject to probate upon your death and the advantage of using a trust to avoid probate is lost.
Why you need to fund your trust
A trust must be funded so that the property you intend to be controlled by the trust will actually be included in the trust. Once you properly fund the trust, your trustee can manage all of the property when you become mentally incapacitated or upon your death. You have to do more than just sign the trust agreement. How you go about funding your trust will depend on the nature of your assets. Not every asset is funded into a trust the same way.
3 Basic ways to fund your trust
There are basically three ways to properly fund a trust, depending on the type of property that needs to be transferred to the trust. These methods include:
- change of title or ownership
- assignment of ownership rights
- change of beneficiary
All of these methods are pretty simple to accomplish, but you still have to follow the required procedures to make sure it is done properly.
Understanding revocable trusts
There are several types of trusts, each with its own purposes, advantages and disadvantages. However, all trusts fall into one of two categories: revocable or irrevocable. It is important to understand the differences between these two types of trusts. When a trust is “revocable” the grantor (person creating the trust) retains the power to modify the terms of the trust or revoke it altogether. This makes revocable trusts very flexible, which is a good thing since circumstances often change resulting in the need for modifications.
How are irrevocable trusts different?
You may have guessed – irrevocable trusts are different because they cannot be modified once they have been executed. This can be a great benefit, though. Because your assets are no longer a part of your estate, they are no longer subject to probate or estate taxes. So, although you must relinquish control of your assets with an irrevocable trust, some will enjoy valuable tax benefits.
Making changes to your trust
There are generally two ways to modify a revocable trust: amendment or restatement. Either way, the result is basically the same so the choice is yours. In some situations, an amendment to the trust will be sufficient. For example, getting married, having children, or having a substantial increase in your trust property are all reasons you may need to amend your trust. Also, whenever your beneficiaries change, and amendment would be property. This most often becomes an issue when a beneficiary dies or you change your mind about giving someone an inheritance. Your estate planning attorney can help you decide the best way to modify your trust.
What happens to property not included in your trust
The answer is simple. Any property that is not properly funded into your trust will need to go through probate. That means before you heirs can inherit those particular assets, the court will need to oversee the probate of your estate, which is costly and time-consuming. As such, if you overlook the need to fund all of your property, your trust will likely not be as effective as you intended.
If you have questions regarding trusts, or any other estate planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.