7. Funding Your Revocable Living Trust

This is part 7 in my series, Estate Planning – What You Need to Know.

Part 7 – Funding Your Revocable Living Trust

Now to get the benefit of your revocable living trust, you have to transfer your assets to your revocable living trust. This is called “funding your trust.” We tell our clients to think of their trust as a big container with instructions. The instructions will control how the assets in the container will be managed.

If the assets aren’t in the container, the instructions don’t apply. If you don’t fund your trust, your assets may still have to go through probate – and then you defeat the primary objective of establishing your trust.

How is property transferred to your trust?

As an example, when you establish a revocable living trust, you and your attorney will record a new deed, which will transfer title of your house from you and your spouse’s name to you and your spouse – as trustee of your trust.

You will also retitle your bank and investment accounts from your individual names to the name of your trust. All property that has title, such as bank and investment accounts, real property, and business interests must be retitled to your trust. Personal property such as furniture, jewelry and clothing has no formal title and can be transferred to the trust with a written statement.

When your trust is funded, the trust owns your property. Although as trustee, you still control everything.

For practical matters, nothing changes except the paperwork. The tax identification number for the trust is your social security number. Your tax returns are filed the same as before you created the trust.

The legal title to your assets is no longer in your name, but in your name as trustee of your trust.

 Example: Your home is titled in the name of you and your spouse:

 Jack Lee and Jill Lee, husband and wife, as joint tenants

 After recording a deed transferring the house to your trust, the title will read:

 Jack Lee and Jill Lee, Trustees of the Jack and Jill Lee Revocable Living Trust

 Avoids Conservatorship

When your trust owns your property, there is no need for conservatorship hearings or probate. If you become disabled, the trust contains provisions naming a successor trustee (most often your spouse, parent, brother or sister, friend or adult children). The successor trustee is authorized to manage your property on your behalf. As a result, there is no need for a conservator. Likewise, when you pass away, your successor trustee is authorized by the trust to administer your trust property, so there is no need for probate.

When your assets have been transferred to your trust, the trust owns it. The trust continues to own it if you become incapacitated and when you die. Because the trust owns your assets, there is no need to get court approval to manage or distribute them.

With a trust everything remains in-house. Upon your disability and death, your successor trustee will follow the trust instructions without the need for court approval or interference.

Brief History – Perspective

Before Revocable Living Trusts became popular, probate attorneys would charge a marginal fee to prepare a basic will knowing that if they outlived their client, they would make big fees on the probate. Now that more people are choosing to create living rusts rather than wills, probate attorneys have either evolved into trust attorneys or have limited their practice to probating wills of clients who never got around to creating a trust.

Bottom Line. With a revocable living trust, your assets can avoid the delays, publicity and costs of probate, which is why a revocable trust is the best choice for most people.

Next up is Part 8: How to Protect Your Children’s Inheritance from Divorce and Lawsuits.

3. What if You Don’t Have an Estate Plan?

Here is Part 3 of my series, Estate Planning – What You Need to Know.

What if You Don’t Have an Estate Plan?

Simply put, if you don’t have a will or a revocable living trust, then when you die, your assets will go according to state law found in the probate code.

If you live in California it goes like this:

  • if you are married, your assets will go to your spouse.
  • If you have children, your separate assets will go either one-half to your spouse if you have one child, and one-third to your spouse if you have more than one child. The rest will go to your child(ren).

If you are not married and don’t have children, your assets will go to your next of kin in the following order:

  • to your parents, if they are alive, then
  • to your siblings, if they are alive, then
  • to your aunts and uncles, if they are alive, then
  • to your cousins, if they are alive, then
  • to your crazy fourth cousin twice removed, if he isn’t alive, then
  • to the state. Believe it or not (or course you can believe it) if  there are no living family members, the state will take your assets. The sophisticated legal term for this is “escheat” – your estate will escheat to the state.

You get the picture. If you don’t have a will or a revocable living trust which states how you want your assets distributed, you have what is called an Intestate estate. Intestate estates are distributed according to the state probate code.

Conservatorship

It’s bad enough to rely on the state to distribute your assets when you die, but it’s even worse to rely on the state to manage your assets while you are alive.

If you become incapacitated, which means you are no longer capable of managing your affairs, e.g. dementia, then someone else must manage your assets for you. For that someone to manage your assets, you must have already signed a Durable Power of Attorney.

A durable power of attorney is a document that gives the person you name the authority over your assets, like bank accounts and real property, if you become incapacitated. The person you name, your Agent, can take the durable power of attorney to your bank and get access to your accounts to take care of you – pay your bills, etc.

However, if you did not sign a durable power of attorney, no one will have the authority to manage your affairs. And once you become incapacitated, it’s too late to sign a durable power of attorney because you are incapacitated. Incapacitated people cannot sign legal documents.

So now what? Your loved ones will have to hire an attorney and petition the court to appoint one of them or someone the court chooses as your Conservator. A conservator is a person authorized by the court to manage your affairs, and in many cases must submit an account of her activities to the court for the judge to review. It is an expensive, tedious and nightmarish solution, which could have been simply avoided if you had signed a durable power of attorney.

Bottom line: If you don’t have an estate plan, state law will determine who gets your stuff, and if you become incapacitated, the court may end op overseeing the management of your assets.

Next up is Part 4.  Why You Need Guardians If You Have Young Children.