Holland, Michigan Will, Trust, and Estate Attorney
Great job! You’ve completed the difficult part. Now comes the easy part. Once you have had your trust drawn up by an attorney, your next step is to fund the trust.
Fund the trust? What does that mean?
A trust is just a piece of paper until it owns things. If you don’t transfer your assets into the trust before you die, the trust cannot do anything for you – it cannot protect your assets from creditors, it cannot dictate the transfer of property, basically, an unfunded trust has no more value than a blank piece of paper.
So how do I fund my trust?
How can a piece of paper own things, you might ask? Simple. Take your house, for example. As part of the preparation of your trust, your attorney should have created what is called a quit-claim deed. This is a deed, similar to what you received when you purchased your house, that changes who the government “sees” as the owner of your house. The deed you received from your estate planning attorney should transfer the title of the property into the name of the trust.
What this means:
Your house is owned by you, John and Jane Smith. The quit-claim deed transfers the title of the house so that the new owner is The John and Jane Smith Living Trust. This transfer changes nothing about how your home ownership works, just how the government “sees” the ownership. You still own the home, you still have to pay the utilities, the mortgage, the taxes, etc. All that changes is, legally, your trust owns your home.
What this does:
When you die, the asset that is the house no longer has to go through probate. It is no longer subject to estate and probate taxes. It passes through the trust to the person you have named as beneficiary in your trust. The beneficiary can then transfer the title to own it outright (i.e. Sam Smith) or keep it in the name of the trust. If the beneficiary keeps the title in the name of the trust, his creditors can no longer take it if he is in collections, is sued, et cetera.
What about my other assets (stuff)?
It works the same for most of your other assets. For financial assets, except for retirement accounts, you change the owner of the account to the name of the trust. This protects the account from having to be probated when you die. The same goes for stocks. In fact, with only two exceptions, all your stuff should actually be owned by the trust. The two exceptions are retirement accounts and life insurance for tax reasons.
Life insurance and retirement accounts (401k, 403b, IRA, RothIRA, SEP, etc.) should NEVER be owned by the trust. The beneficiary of these should ALWAYS be an individual. The simple answer as to why is because of tax reasons. The complicated answer is that life insurance is not taxable as income except when the beneficiary is a trust and retirement accounts lose their tax benefits on your death when owned by a trust.
So I’ve funded my trust, now what?
Now you live your life. Your assets are protected when you die and your loved ones don’t have a mess on their hands once you’re gone. From time-to-time, you will need to update your trust, such as when you have major life changes (marriage, divorce, children, etc.). If your assets change, such as the sale of a house and the purchase of a new house, you will need put your new assets into the trust. However, once your trust is funded, you don’t have to revisit it again unless something changes. Put it down and walk away. You’ve prepared as best you can, now you go about your life as normal.