Revocable living trusts are great tools to achieve various estate planning goals. These trusts work on your behalf in the event of incapacity by allowing you to make decisions on how assets are transferred at your passing to your heirs. Revocable living trusts can be changed, assuming you have the mental capacity to do so. Once you create it, you can amend, restate, or get rid of it all together (revoke the trust).
Goals for Revocable Living Trusts
There are multiple goals when it comes to usage of revocable living trusts. Avoiding probate is usually near the top of the list. Probate can be quite time consuming with the involvement of a court process to administer an estate. This has gained importance lately as the COVID-19 pandemic has placed additional delays on the court systems, often making the process more lengthy than usual. Another goal with a revocable living trust is to have a private administration of your estate as opposed to probate administration, which is a public court proceeding. Please note that having a revocable living trust does not mean you avoid the estate administration process. Your heirs will still have to work through it. However, it makes it relatively more efficient and private, compared to going through a probate proceeding.
Creating the revocable living trust is a crucial step to achieving these goals. It’s not, however, the only step. The revocable living trust only controls the assets that have been placed into it or transferred to the trust. This process is called funding the trust. It is the process in which the trust maker transfers the assets from his or her own person to that of the trust. Funding the trust is a requirement to assure that the tool works as you intended. If not properly funded, it will not avoid probate.
Here’s an easier way to think about it: A revocable living trust is like a new vehicle. The funding of the trust is the gas you put in it. Without the gas, that new vehicle looks great, but isn’t going to do what you need it to, nor will it go anywhere. The same is true with a revocable living trust.
How to Fund a Revocable Living Trust
You can fund your revocable living trust with most types of assets. The exact method of transferring the asset to the trust depends on the type of asset, its value, and the laws in the jurisdiction where the property is situated. Funding a trust often involves changing the titles of assets from a person’s individual name to the name of the trust. Likewise, deeds changing ownership from a person’s individual name will need to be switched to the name of the trust. If you want to convert financial accounts or real property titles to Transfer on Death (TOD) accounts/titles, you’ll need to name the trust as the TOD beneficiary. Other funding methods may include assignments of business interests and change of beneficiary designations.
We would, however, like to note that some accounts should not be re-titled, such as retirement accounts - IRAs, 401(k)s and 403(b)s - or others like Health Savings Accounts (HSA) and Medical Savings Accounts (MSA). If you re-title any of these accounts, you may be subject to taxes and penalties because it could be considered a withdrawal of funds. However, these accounts still avoid probate, as they are controlled by beneficiary designations at death, which are a non-probate transfer.
After you initially fund your revocable living trust, you need to make sure it continues to be properly funded as you acquire or sell assets. Periodic reviews of the funding process should be completed. Again, think of it like the new vehicle analogy: You need to keep putting gas in your vehicle to keep it working as you intended. The same is true for a revocable living trust.
AgCountry’s Succession and Retirement Planning Department is available to work with you on your planning needs. Talk with your AgCountry loan officer or local branch for more information.
