Mistakes to Avoid When Funding a Trust

Trusts, particularly revocable trusts, are powerful and versatile estate planning tools, but merely creating a trust is only part of the process. Trusts must be funded if they are to accomplish their purposes. Generally, funding a trust involves transferring ownership of assets into the trust so the trustee can manage and distribute them in accordance with the trust’s terms. But there are right and wrong ways to fund a trust, and mistakes in funding can have significant financial implications down the road. Below are some of the most common trust-funding mistakes our Springfield elder lawyers see. 

Assuming the Trust Is Automatically Funded

One of the most common and damaging misconceptions in estate planning is that creating a trust automatically transfers assets into it. In reality, trusts are simply legal entities that must be funded with property to function as intended. Beneficiaries have rights only in property held in trust; if assets are never transferred, beneficiaries have no rights in them. And because assets held in trust are not subject to probate, any assets a settlor fails to properly transfer to the trust must go through the lengthy and expensive probate process. 

Failing to Properly Transfer Real Estate

Real estate is frequently overlooked in trust funding despite being the most valuable asset most settlors own. When transferring real estate to a trust, the settlor must execute a new deed naming the trust as the owner, which generally involves preparing a new deed, recording it with the recorder of deeds in the county where the property is located, and notifying insurers and mortgage lenders of the transfer. The process of transferring real estate into a trust is more complex and error-prone than that for other types of assets, which makes it especially important to work with a Springfield elder lawyer if you plan to transfer real estate to a trust. 

Improperly Retitling Bank and Investment Accounts

A common misconception is that merely listing a bank or investment account on a trust’s schedule of assets transfers ownership to the trust. However, financial institutions typically require retitling an account into the name of the trust’s trustee before it is treated as a trust asset. For example, a bank account titled merely “John Doe” generally would not be treated as trust property, while a bank account titled “John Doe, Trustee of the John Doe Revocable Trust” generally would be treated as trust property. 

Mishandling Beneficiary Designations

Certain types of assets — such as life insurance policies and retirement accounts — pass directly to the beneficiaries named therein without going through either probate or a trust. But even a properly funded trust can be undermined by mishandled beneficiary designations. For example, complications could arise when a trust leaves the settlor’s estate to all of their children in equal shares, but the settlor’s life insurance policy names only one child as a beneficiary. Such mistakes can be avoided by carefully coordinating beneficiary designations between various estate planning tools. 

Transferring Assets That Should Not Go Into a Trust

Contrary to popular belief, not all assets should be transferred into a trust. Some assets are better handled through non-probate transfer mechanisms, such as certain retirement accounts, vehicles, and assets subject to contractual restrictions on transfer (e.g., closely held business interests). Forcing all assets into a trust can create unnecessary tax and administrative burdens with little additional benefit. For more information about assets that should not go into a trust, as well as how to coordinate trusts with non-probate transfers, speak to a Springfield elder lawyer. 

Failing to Update the Trust After Major Life Changes

Life moves pretty fast. That’s why you should periodically reevaluate your estate plan to determine whether it still reflects your wishes after a major life change. Common life changes that typically lead to estate plan updates include: 

• Marriage or divorce
• The birth or adoption of children 
• Disability or special needs planning
• Significant increases or decreases in wealth 
• Relocation to a different state with different estate laws

While Missouri courts attempt to carry out the settlor’s intent when administering trusts, outdated documents often result in distributions the settler never intended. 

Failing to Add Newly Acquired Assets

Similar to reviewing a trust after a major life event, settlors should also take care to add newly acquired assets to it (if they wish). Some common examples of later-acquired assets that settlors often forget to add to their trusts include new houses or vacation homes, new brokerage or savings accounts, and business interests formed after the trust was created. Failure to add later-acquired assets can result in those assets having to pass through probate. 

Overlooking Business Interests 

Incorporating business interests into an estate plan is a critical component of business succession planning, and failure to do so can often lead to power vacuums and fragmented ownership. Transferring business interests into a trust allows the successor trustee to step in immediately to manage the business’ affairs. However, as mentioned above, not all business interests are appropriate for trusts, so you should speak to a Springfield elder law attorney for more specific information. 

Overreliance on Pour-Over Wills 

Pour-over wills direct any assets not explicitly transferred to a trust during a person’s lifetime to “pour-over” into a trust upon their death, thus acting as a safety net of sorts for any assets the decedent forgot to transfer into their trust. However, there are several limitations associated with them, primarily that they do not avoid probate or transfer assets during incapacity. As such, they generally should be used only as a backup trust-funding mechanism. 

Fund Your Trust the Right Way With Help From a Springfield Elder Lawyer

The trust-funding process is filled with pitfalls for the unwary, and even minor mistakes can result in major headaches. The best way to avoid such headaches is to work with an experienced attorney to set up and fund your trust. For more information about funding trusts, please contact a Springfield elder lawyer at the LifeGen Law Group by calling 417-823-9898 or using our online contact form.