Failure to Fund a Trust?

I recently was “called on the carpet” by a deceased client’s daughter, the financial advisor, and his staff, because trusts were set up to avoid probate and protect her brother as a beneficiary from bad decisions. However, half an IRA went directly to the son and the money was being wasted by him and his wife. How could this be if these protective trusts were set up? Why did dad spend all this money on trusts if things were not going to do what they were designed to do?!

And, of course, the blame was being put on me as the lawyer. While the financial advisor was calmly trying to shift the blame to me and away from his firm, the daughter was crass, rude, and abusive trying to put everything on my firm. The Zoom ended abruptly. Then I created an email to the financial advisor with my notes from the client review four years ago and the changes he made last year with the notations in my notes that the client flatly refused to discuss any assets outside of the trust and one bank account. The financial advisor did apologize to me even before he knew about the email and I hit send. The father had actually assured me everything was taken care of with the funding of his trust, and there was no need to discuss his financial accounts. Obviously, it wasn’t taken care of, but as a lawyer there’s only so much you can do to help a client if they are not willing to cooperate.

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It's the classic problem with the living trust…

The paperwork is done. It is locked away and the person begins to rest easy thinking this his/her assets and children are protected. Then they pass away, and his son who is his successor trustee-learns that the house wasn't transferred into trust. That it is going to have to go through probate to be sold. Over time it becomes clear that his checking accounts, his stocks and mutual funds, his CD's, none of this is in trust either.

So what IS in trust?

Zero. Nothing.

And what was the purpose of spending the extra money to establish a trust so he could save his kids from probate if they end up going through probate anyway?

Good question.

When assets are not re-titled in the living trust's name, or the pay on death beneficiaries are changed to work in conjunction with the overall plan, the outcome can be absolutely horrific. The process of making these changes to work with the living trust is called "funding."

The estate may be unnecessarily squandered on probate fees, tax shelters could fall apart, and his children may end up spending years trying to sort out the mess. Getting the trust paperwork in place is an important step, but creating a living trust doesn't stop there.

Funding it is CRITICAL.

And the sad reality is that a lot of estate planning professionals either ignore this step or don't know about it. Whether the professional actually handles the transfers or simply provides the funding instructions to the client, this is a critical part of making your trust plan effective. So how do you properly fund your trust? What should go in trust and what should stay out? And how do you make sure your trust owns all of the assets it's supposed to?

Funding Your Trust

Funding your trust often means that you transfer ownership of some of your assets to your trust. Technically, this means that you give up "ownership" of your assets and place them in your trust's name instead. However, as long as your trust is drafted correctly, you are not in danger of losing control of your assets.

When you do transfer assets into the name of your trust, the title on those assets will look something like this:

"The Johnson Family Trust, dated January 6, 2025, Bill and Mary Johnson, Trustors and/or Trustees"

Beware: Listing your assets in a Schedule A in the trust DOES NOT mean that it is funded.

The title of your assets needs to be transferred into the name of the trust. Don't let anyone convince you differently. So where did this “Schedule A” rumor get started? In California only, if you list trust assets in a schedule but don’t actually change title, then there is a process through the court system where an attorney can petition the court to have the assets transferred to the trust after death… in other words, it’s a form of probate. So even in the less expensive, less time-consuming aftermath of not properly funding a trust, lawyers in California can get away with not actually funding a client’s trust, list them in a schedule, and then go to court to bypass the full-blown probate, and still get paid for their work.

Doesn’t really sound like it’s avoiding probate to me.

If the title of your assets is not transferred into the name of the trust, or the beneficiary doesn't list the trust (or individuals or an IRA Trust), the trust doesn't own the assets, it is not funded, and it becomes a testamentary trust-which is little better than a fancy Will. Your estate will go through probate in this case. So make sure you review the language above and talk to your estate planning professional about the paperwork necessary to transfer your assets into trust. In my firm, we provide a specific list of recommendations to our trust clients so they can go to their financial institutions and make sure the trust is properly funded.

For more information, check out the free educational materials, including the specific chapter on funding a trust in my book Estate Planning Basics here:

http://www.FreeTrustCourse.com

As with most things in life, and in this case after you’re gone, to get the best results you have to have a strategy and put in the work. It’s no different when using a revocable living trust in estate planning.