Once a revocable living trust is created, it needs to actually become the owner of your assets in order to have any effect. The process of transferring ownership to the trust is called funding the trust. In some cases, funding also includes naming the trust as beneficiary of annuities, life insurance, IRAs, and retirement plans. Trust funding is vitally important because without it your trust is largely ineffective and you will have wasted your time and money creating it. Think of it this way: Your trust is a brand-new car. It looks great, smells wonderful, and has every driving convenience available. But if you don’t put gas in the tank, it can’t take you anywhere. It might as well be a lawn ornament. It’s the same for your trust: your property is the gas that makes it run.
Yes, and this is one of the greatest advantages of the revocable living trust. Without a trust, not only will the property you own in the state where you are legally domiciled be subject to probate, but the property you own in another state will go through an ancillary probate in accordance with that state’s laws. For example, if you own your home in Florida and own land in Illinois, your heirs will have a probate proceeding in Florida and an ancillary probate in Illinois, whether you have a valid will or not. By funding both properties into your single living trust, you eliminate the need for both probate proceedings.
There are several resources you may want to consider when funding your living trust. The first is the attorney who drafts your estate planning documents. Usually, he or she will need to file the deed for any real estate that is being placed in your trust and may fund your non-real estate assets for you or give you letters or instructions that will help you transfer those assets. However, your CPA, CFP, or financial advisor can also help with retitling non-real estate assets or with completing forms to name your trust as beneficiary. Examples of such assets are bank accounts, investment accounts, motor vehicles, and IRA. Considering how important it is to have your assets properly titled once your revocable living trust has been created, it would be wise to seek the assistance of all your advisors in funding your trust.
Your bank and brokerage firm need to know who has authority to act on behalf of your trust, as this information will insulate them from potential legal liabilities. It is usually sufficient to provide these companies with a document sometimes called a memorandum or affidavit of your trust, rather than giving them the entire trust. The memorandum or affidavit usually shows the name of the trust and a list of the trustees and successor trustees. It may be accompanied by the Trustee’s Powers section of your trust or an abbreviated listing of the authority you and your successor trustees have over assets that are placed into the trust. Your estate planning attorney can prepare a memorandum or affidavit of trust for you when your estate planning documents are created.
Assuming your living trust is revocable, which means you maintain control over it and can make changes to it until your death or legal incapacity, you will not have to file a trust income tax return while you are living. You can continue to file your single, joint, or separate personal tax return using your Social Security number as usual. At your death, a separate tax return may be required for the trust. The successor trustee should seek proper professional advice on preparing this return.
