11 Steps to Fund Your Living Trust*
Find out the proper way to fund your trust so that it will accomplish your goals and learn what assets you should not transfer to your trust.
Signing a living trust isn’t the end of the estate planning process. You also need to fund a trust; i.e., put your assets into your wagon. Knowing how to fund a living trust is vital for the trust to accomplish its goals. You have all the instructions you need in your portfolio under the instruction tab, but this is a great reminder!
Funding a living trust involves transferring property to the trust. An asset not transferred to the trust is not owned by the trust. It remains in your name as an individual and will be subject to probate (unless you’ve used another technique to avoid probate). Don’t be fooled by jointly owned assets, as they too may be frozen and caught-up in the probate process.
How to fund a trust varies depending upon the nature of the property. You can transfer ownership, or, in some cases, designate the trust as a beneficiary upon your death. Let’s look at some of the details to successfully load your wagon.
1. Transfer Real Estate
Transferring real property to a trust requires a deed, typically a quit claim deed. The deed needs to be executed as required by law in the state where the property is located, with the required witnesses, notary provision, recording with the appropriate agency, etc. You may need to file a copy of the trust document or a summary of the trust called a memorandum of trust or certificate of trust. This summary is preferable because it is typically one or two pages and avoids having the details of the trust document being recorded in the public record of the register of deeds. If your property is subject to a mortgage, or a homeowners association, you may need to obtain the permission of the lender and the association. Caution: A real property transfer normally results in a transfer tax and other fees. Some states exempt the transfer to a living trust, some charge a nominal fee, and others consider it a sale at full market value and assess the full taxes and fees. For a personal residence, some states give a homestead exemption (resulting in lower annual property taxes), and some limit the annual amount of property tax increase. You want to be sure that a transfer won’t incur substantial fees or eliminate such homestead or tax increase protections. In North Carolina, there are no additional transfer taxes or fees as a result of the property being transferred into a living trust.
2. Transfer Titled Personal Property
If personal property has a title document (cars, trucks, motorcycles, RVs, ATVs, boats, airplanes), it will be necessary to obtain a new title showing the living trust as the owner. Caution: Until the vehicle is paid off, the lender holds the title and it is just a debit. Also, ask your insurer if a transfer will affect your premiums before you transfer it. Lastly, make sure to add your Trust as an “additional insured” to the policy so there is coverage in the event of an accident.
3. Fund Untitled Personal Property
Personal property without a title document (furniture, books, jewelry, tools, collectibles, etc.) can be transferred with an assignment of ownership document, which must be signed and dated. This is not required, but it may be a good idea for items that you want to ensure are received by certain people or for items that are higher value and you want to make sure that the item is not tossed out for a yard sale or charitable donation. NOTE: It is important to adequately describe the property so that there is no doubt about its identity.
4. Transfer Bank Accounts
Your bank can tell you how savings, checking, and money market accounts can be titled in your trust. Most banks allow you to keep the same account number and you do not have to change your checks to name a trust. However, some may require closing the account and opening a new account in the name of the trust, in which case you can keep your account and just name the trust as POD (payable on death). If you want to do this with a Certificate of Deposit (CD), be sure that your bank won’t consider this an early withdrawal and assess penalties. If they do, then ask the amount before deciding. Otherwise, you can wait for the CD to mature, then open a new CD in the name of the trust.
5. Fund Securities
Your broker can advise you how to retitle a brokerage account or get stock and bond certificates reissued (a complex process). A non-qualified annuity can be retitled or the trust can be made a beneficiary. Caution: For brokerage accounts that are qualified retirement accounts, see the section below on Retirement Accounts.
6. Transfer Business Interests
Interests in partnerships and LLCs (including shares in a corporation) can be retitled in the name of the trust. Check the partnership agreement, LLC operating agreement, or articles of incorporation for transfer restrictions or procedures.
7. Change Life Insurance Beneficiaries
Your trust can be the owner and/or the beneficiary of a life insurance policy. Making the trust the owner allows the trustee to manage the policy in the event you become mentally incapacitated, such as borrowing against the policy to obtain funds for your care. Caution: In many states the cash value of a policy is exempt from creditors—but only if it is owned by the individual. Protection against creditors may be lost if ownership is transferred. Instead, you could use a power of attorney to allow someone to manage the policy.
8. Transfer Royalties, Copyrights, Patents, and Trademarks
Whoever pays the royalties can advise you what is required to transfer the interest to your trust. Consult the United States Copyright Office for copyrights and the United States Patent and Trademark Office for patents and trademarks.
9. Gas, Oil, and Mineral Rights
The nature of these rights varies. If the rights are part of property you own, you can use a deed. If you own rights in property you don’t own, or have a lease or royalty agreement, an assignment of rights document will be necessary. Contact whoever pays you to learn what will be required to make the change. The document may need to be recorded. This is a complicated area, so you may want to consult an attorney.
10. Accounts Receivable
An assignment of rights—a legal document changing who has the right to a debt—can make your trust the recipient of payments received on loans you have made to anyone (such as an unsecured personal loan or a loan secured by a mortgage). This includes promissory notes or any debt you expected to be repaid after you are gone.
11. Making The Trust as Beneficiary
Some assets may not be transferred to a trust, but you may be able to make the trust the beneficiary upon your death. These assets include:
- Retirement Accounts. Do not retitle any qualified retirement account, such as IRAs, 401(k)s, 403(b)s, or qualified annuities, including those in brokerage accounts. This will be considered a withdrawal of the funds, subjecting them to income tax and maybe penalties. Instead, change your beneficiary designation. Whether your trust should be the primary or secondary beneficiary depends upon your goals and tax laws. If you are looking to control those accounts after you are gone, you may need a look-through trust.
- Medical Savings Accounts (MSAs) and Health Savings Accounts (HSAs). Your trust should be designated as either the primary or secondary beneficiary (like a qualified retirement account).
By transferring your assets into your living trust (aka, your “wagon”), you bring them under the legal protection of this powerful estate planning tool. Once the trust is funded, the assets it holds will be protected from probate in most cases and offer your family peace of mind. Again, if you leave assets out, they may very well be frozen and have to go through probate. The moral of the story of the Wagon—be diligent in getting your assets into your wagon! Happy Estate Planning!
* By Edward A. Haman, Esq., as updated September 29, 2020, with edits by Stacey Walters
