I often counsel clients with existing estate plans. Many of these clients are seeking out counsel because they question whether their existing estate plan, sometimes drafted decades earlier, truly portrays how they want their estate plan carried out. In many instances, their trust has not been properly funded. The following are common trust funding mistakes, that if made, could leave a disorderly legacy for your spouse, children, and other family members.

Funding Mistakes

A trust is a legal entity that holds property. Property must be properly transferred to a trust in order for that trust to avoid probate. Probate is the judicial process that determines whether your estate plan is valid or invalid. Below are several items to consider when funding your trust plan in order to avoid probate:

1. Real Estate and Time Shares: Many times an individual will refinance their home, sometimes several times, over the course of their lifetime. In order to refinance the property, the property is transferred out of the trust. A common pitfall is an individual failing to transfer their property back into their trust. If that individual were to pass away, that property would go into probate. It is important to keep in mind that any property located in a state different from an individual’s state of primary residence falls into “ancillary probate.” Ancillary probate means that the probate proceeding would occur in the state in which the property is located. It is also important to remember to transfer time shares, also a form of property, into the trust. Time shares are commonly overlooked when an individual is funding their trust.

2. Other Property Interests: Another pitfall is overlooking other property rights you may own. Occasionally real property will contain water rights, mineral rights, and gas and oil rights. If you own land with water rights, mineral rights, and gas and oil rights, you will need to deed that land into your trust. If you own only the rights to water and mineral, gas and oil deposits, but not the actual property itself, you will need to assign your water, mineral, gas and oil rights to your trust.

3. Financial Accounts: It is important to fund all of your bank accounts and brokerage accounts into your trust. Many individuals fail to fully fund all of their accounts into their trust. Carefully consider all the various accounts you have and whether or not they fall under the definition of a bank account or brokerage account. In order to fund your account into your trust, you will need to re-title the name of your account from your name into the name of your trust. This is typically done through a “letter of instruction” to the financial institution that holds the account. Your financial institution can guide you through their exact requirements. Please keep in mind that qualified accounts, such as an IRA or 401(k), should not be funded into your trust. When you fund these types of accounts into your trust, it changes the owner from you to the trust. The IRS considers this a 100% withdrawal of the funds. This causes 100% of those funds to be taxed as part of your income for the year in which those accounts were funded into the trust. Instead, simply change the beneficiaries in your qualified accounts to mirror the beneficiaries in your trust.

Careful thought and consideration should go into the funding of your trust. If you avoid the common mistakes and consider the advice detailed above, you will have a trust plan that is funded correctly. This will avoid probate and allow your designated trustees to execute your plan as you envisioned for your beneficiaries.

For additional reading:

Maintaining Your Estate Plan

The Heartache of Poor Estate Planning

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