Introduction

In this beginner’s guide article I will explain why you need to fund your Revocable Living Trust, and how to do it.

First, let’s clarify two things to make sure you don’t get lost and get the most out of this article.

What is a Trust Again?

A Revocable Living Trust (from here on out, I’ll just refer to it as a Trust) is an estate planning (and wealth building/protecting) tool that is used in lieu of a Will. The purposes of a Trust can vary, but primarily a Trust will allow you to avoid probate when you pass away, thereby allowing your property to pass on to your family without the need for court intervention, unnecessary attorney fees, and exposing your financial affairs to the public.

A Trust can also provide many other benefits, such as creditor protections for your family after you pass away. However, I won’t into detail on all of the benefits of a Trust as it would make this article too long and cumbersome to read. If you’d like to learn more about the benefits of a Trust and estate planning overall, you can watch our Free Estate Planning Webinar at your leisure.

What is Funding a Trust?

Next, the term “funding your Trust” refers to the process of transferring ownership of your property to your Trust. Your Trust is treated as a separate entity than you. Immediately after you create your Trust, it doesn’t actually own anything. The only ways your Trust will likely own any property will be if you transfer property to it, or if you accept property into your Trust (perhaps in the form of a gift from another family member). Again, this process of transferring your property to your Trust is referred to as funding your Trust.

Why Fund Your Trust?

It is CRITICAL that you fund your Trust. If you do not fund your Trust, then you will miss out on one of the primary benefits of having a Trust: avoiding probate.

You see, you avoid probate with a Trust because everyone who dies has to go through probate to transfer his/her property to the appropriate beneficiaries, even if you have a Will. However, if you properly funded your Trust while you’re alive, then at death you don’t actually own anything. Remember, your Trust is treated as a separate entity than you. Thus, by funding your Trust you can avoid probate, and the terms of your Trust will determine how your property is transferred (without the need for a probate case, without litigation and attorney fees, and without prying eyes from the general public).

In case you’re worried about losing your property, you are always free to take the property back out of your Trust. That is why it’s called a Revocable trust. If you’d like help funding your Trust or need to set up a Trust in the first place, you can contact my office to help.

If you fail to fund your Trust, then you for sure will go through Probate. If you have a “pour-over” Will that transfers any property you happened to own at death to your Trust, then your property should still be transferred to your Trust after probate, and then your Trust will determine where your property goes and in what manner. However, if you do not have a “pour-over” Will, or there is a problem with that Will, then your property will not go to your Trust and your Trust will do nothing for you (or your family) after you pass away.

Therefore, it is critically important that you fund your Trust while you’re alive.

Who Controls the Trust Property After Funding Your Trust?

Understandably, you might be worried about transferring your property to your Trust because you don’t want to lose control of your property. For most Trusts, you (and possibly your spouse) will be the Trustee during your lifetime. Thus, you will be the person in charge of your Trust and your property after funding your Trust. Additionally, because your Trust is revocable, you can take property back out of Trust at your sole discretion.

A couple notes of caution. Arizona is a community property state. Transferring property to your Trust might have an impact on the characterization of any separate property you own and transfer to your Trust. It is incredibly important that you consult with an attorney before transferring any of your separate property into your Trust. Over the years I have seen people lose millions of dollars (in divorce) in separate property because of poorly drafted trusts and/or a failure to understand the repercussions of their trust terms.

Additionally, it is incredibly important before transferring any property, community and/or separate, into a Trust that is designed to be only one spouse’s Trust. Doing so may transfer property interests completely as either a knowing attempt to defraud you, or ignorantly depriving you of your property rights.

The moral of this story: you should seek legal guidance before funding your Trust. In most cases, funding your Trust will be relatively straightforward; however, there can be complicating factors such as owning separate property that can cause a land mine of a legal problem if you’re not careful. Thus, even if you have to spend $100 to have a consultation, it will be well worth it so you don’t unwittingly divest yourself of tens or hundreds of thousands of dollars in your separate property.

How to Fund Your Trust and with What Property?

Generally speaking, you will want to transfer all of your property to your Trust. However, as I’ll discuss below, there are some exceptions that you should consider and discuss with a trust attorney. The process of transferring property to your trust will typically take the form of (1) transferring title to the property; (2) assigning property via an assignment document; or (3) designating your Trust as beneficiary. Let’s look at some of the common assets you might own.

Real Estate

Real estate ownership is identified through titles. Thus, if you own a home or other real estate personally, you will need to transfer title of that real estate to your Trust. In Arizona, there are some legal requirements for transferring property to your Trust. For one, the grantee on the transfer deed will be the Trustee of your Trust in that capacity. For example, if you are the current (and only) trustee of your Trust, then you would take title as Youself, Trustee of the name of your Trust. Additionally, you will be required to identify the names and addresses beneficiaries of the Trust on your transfer deed. See A.R.S. 33-404.

A transfer of (Arizona) real estate to your Trust will not require a valuation affidavit as the transfer is exempt per A.R.S. 11-1134(B)(8). That being said, there are other important considerations before transferring real property to your Trust.

Like most people, you’ll likely have a mortgage on your home/real estate. Most mortgages have an acceleration clause which basically means you will have to pay the outstanding mortgage balance if you transfer ownership of the property. Transfer of your property to your Trust may or may not violate this clause. Thus, it will be important to review your mortgage documents before transferring your real estate to your Trust. Even if it technically violates the clause, most mortgage companies won’t act on it, nor care. However, to be safe, it can be a good idea to communicate your intentions with your mortgage company and confirm that your mortgage loan will not be accelerated.

In a similar vein, transferring your real estate may have the effect of voiding existing insurance policies, such as any title insurance or homeowner’s insurance you have. It is important to review your insurance policies (boring, I know) to make sure that you and your house will still be covered if you transfer it to your Trust. If you’re not sure, you can have a trust attorney review the policies for you, or you might be able to get a straight answer out of the insurance company.

In sum, you will ultimately need to transfer title of your real estate to your Trust to properly fund your Trust and avoid probate over your real property. Please note that the considerations mentioned above are not the only things you should consider before transferring real estate to your Trust.

Property Held in Other States

If you own real estate in another state, or maybe another type of asset (plane or boat for example), then you will likely want to transfer title to that property to your Trust. For example, if you own real estate in another state and fail to transfer it to your Trust, then you will have to go through probate in that state. As if probate weren’t bad enough, you certainly don’t want your family to have to engage in probate proceedings in another state due to the time, effort, money, and travel that will be required. Thus, just as described above, you will want to transfer real estate in other states to your Trust. It is best practice to enlist the help of an attorney in that jurisdiction to make sure that the transfer meets that state’s legal requirements so the transfer is effective.

Vehicles

Although the general rule is to transfer all (or most) of your property to your Trust, there are exceptions. Vehicles, specifically your daily driver, can be one of those exceptions. The reason is liability and potential exposure to lawsuits. If you were to get into an accident (that’s your fault) and it comes out that your vehicle is owned by a Trust that you control, the other party may think you have a lot of money and may be more litigious as a result. Many car accident cases are settled through insurance payouts and even if the damages go slightly over policy limits, there is not always a lawsuit. However, if your Trust comes into play, the other party may be more interested in pursuing a lawsuit against you.

In Arizona, you are able to designate a beneficiary for your vehicle upon your death. Because of this option, it might be best to not transfer your vehicle to your Trust, but instead opt for the beneficiary designation as an estate planning alternative. I’ve written a separate article on this process, which you can read here if you’d like to designate a beneficiary for your vehicle upon death.

Property with Liabilities

Similar to vehicles that you drive regularly, it might be best to not transfer property into your Trust that carries with it high potential for liabilities that expose the owner of such property. To be clear, a (Revocable Living) Trust does not provide creditor protection for you, the creator of your Trust. Nevertheless, it might not be a great idea to transfer property to your Trust that will expose the owner (and the owner’s property) to further liability, such as contaminated property, or other assets that have a high degree of claims/litigation. Most people won’t own such property, but this should help you be more mindful about what you’re going to transfer and think carefully before blindly transferring everything to your Trust. Just like tax planning should not be the controlling factor for your estate plan design, avoiding probate need not be only deciding factor as to whether you transfer certain assets to your Trust.

Life Insurance

If you have life insurance, then chances are you’ve already listed your spouse as the primary beneficiary and then your children (if any) as secondary beneficiaries. Deciding whether to make your trust the primary beneficiary of your life insurance policy requires quite a few considerations. Perhaps the two most common considerations are whether you have young children, whether you want your children to have large, lump sums of money all at once, and your creditor and liability situation. One of the primary pros of designating your Trust as beneficiary of your life insurance policy is that you can then determine how those funds are used for a longer period of time (per the terms of your Trust). This allows for more flexibility if you have a blended family and/or younger children who cannot or should not receive large sums of money all at once. The major con of doing so is that it can further expose your insurance death benefits to creditor claims of your estate unless other precautions are taken and depending on the language of your Trust.

If you end up choosing to transfer your life insurance policy to your Trust, doing so is typically as simple as naming your Trust on an updated beneficiary form and providing that to your insurance company. You might have to provide a certification of the Trust’s existence and some other documents to your insurance company.

I will point out that naming your Trust might delay the payout by a small amount of time as there will be additional documents you will need to provide to the insurance company. However, if done diligently, this delay will either be non-existent or maybe a couple weeks.

Retirement Assets

Similar to life insurance proceeds, you might be wondering whether you should change the beneficiary designations to your 401k or IRA accounts. Of note, you would not transfer these accounts to your Trust, but you might consider designating your Trust as beneficiary. To do so you need to update the beneficiary designation with a form provided by your 401k or IRA company. Deciding whether to do so requires some though on your circumstances and wishes.

I will also point out that your retirement assets will likely pass outside of probate whether or not you designate your Trust as beneficiary as the retirement assets will pass based on your beneficiary designation. It is possible that your retirement will end up in your estate and go through probate if all of your designated beneficiaries pre-decease you.

The major negative to leaving your retirement to your Trust is that you can negate the opportunity to continue tax-free growth of your retirement assets. There are certain tax rules with retirement beneficiaries, and unless certain requirements are met, your retirement may need to be pulled out in as little as 5 years after your death. This could potentially cause greater income tax liability and miss out potentially on more years of tax-free growth. Thus, if you are going to designate your Trust as a beneficiary, you should discuss doing so with a trust attorney first. Additionally, you might want to consider a standalone retirement trust for this very purpose in case your existing Trust won’t work for your retirement and so you won’t have to reinvent the wheel.

The major positive would be greater control of your retirement assets after your death. If you designate another beneficiary, such as your spouse, then you can have some tax advantages, but on the flip side you lose control as to what happens to your retirement after your spouse dies. This can be problematic for blended families and for married couples where one spouse may not be great with handling and investing money. Making your Trust the beneficiary of your retirement can allow you to provide for your surviving spouse while alive, and then turn the funds over to your other beneficiaries (likely your children) per terms that you set forth. If done correctly, this approach can largely mitigate the income tax consequences of exercising this greater control. But again, this aspect of funding your Trust is more complex and should be done after consulting with a trust attorney.

Bank Accounts

Although you may not realize it, many bank accounts have a pay-on-death clause with a beneficiary designation. You would have indicated your beneficiary when you opened the account. This can be a means of avoiding probate; however, it doesn’t give you a low of control over how the funds are used, when they are transferred, and whether those funds should benefit multiple people.

For savings accounts and other accounts that you don’t regularly access for use, you might want to consider renaming those accounts into the name of your Trust. That way, when you do eventually pass, your Trust will have liquid funds already accessible for implementing the terms of the Trust and these assets will avoid probate as they are already held by the Trust. To do this you would open an account or change the account ownership to yourself, as trustee of the name of your Trust–similar to how you would take title to real estate.

Personal Property

Unlike cars and real estate, you almost certainly own a lot of personal property items that don’t have any formal title to indicate ownership. However, some of these items can be as important, or maybe even more important when it comes to avoiding probate and transferring to the correct person(s). To ensure that any dispositive provisions in your Trust are honored, it is imperative that you fund your Trust with personal property that you are specifically gifting to anyone, as well as most other personal property items to avoid probate. To transfer this type of property to your Trust, you can execute an assignment document that identifies your personal property and specifically transfers it to your Trust, and accepts the transfer into your Trust through your role as Trustee.

LLC Interests

I’ve created a separate article on how to transfer your LLC to your Trust. For this article, I’ll summarize the major points. An LLC interest is treated as personal property in Arizona. Thus, like personal property as discussed above, you would create an assignment document to transfer your LLC interest to your Trust. Unlike simple property items you might own, like jewelry or antiques, transferring your LLC interest can be more complicated depending on whether there are other LLC members and the terms of the LLC’s Operating Agreement. If you have an LLC, you should read this article first before transferring your LLC interest to your Trust.

Conclusion

The importance of funding your Trust (transferring your property to your Trust) cannot be overemphasized. That being said, as you can see, there are a good deal of considerations to think about before transferring certain types of property to your Trust. If your estate plan and Trust was created by a good trust and estate planning attorney, then you might already have some direction and guidance on how you should proceed. If not, then I would recommend that you consult with a trust attorney before funding your Trust. If you’d like to have a consult to discuss your Trust and funding it, you can get in touch here to schedule your appointment.