Consider this scenario: You hire an attorney to draft a revocable living trust in order to shield your assets from probate. After collecting the relevant information your attorney drafts a well-crafted revocable living trust, along with a pour-over will. After reviewing the trust with your attorney, you sign the trust. You are happy, since you now have a great way to retain full control over your assets without having the Probate Court involved in your affairs after you pass.
Now, some years later, you pass away and your successor trustee begins the process of administering the trust, assuming her duties to distribute the trust property to the beneficiaries as you directed in your trust. The trustee, however, to her dismay, learns that the trust holds no property and, after a consultation with Attorney, finds that the entire estate must be probated because the trust was not funded properly. Your ultimate goal of avoiding probate is quashed. How could this have happened?
This unfortunate situation can arise because 1) your attorney did not advise you on how to properly fund the trust with your assets or, 2) you failed to heed the advice that every experienced estate planning I know always gives his or her clients, which is to make sure that all real estate, investment accounts, retirement accounts, bank accounts, stock, bonds, business interests and life insurance policies are to either retitled in the name of the trust or name the trust as a beneficiary.
Because this essential step in the estate planning process was overlooked so many years ago, your assets will need to be transferred to your trust by way of the Probate Court having jurisdiction where you resided when you passed. Even thought you may have believed that your estate plan was firmly in place, what you really have passed on to your family is the equivalent of an automobile without gasoline. While it is understandable that your family members might believe that everything was properly handled, the Court will not be so generous. In addition to the forms and deadline associated with opening and administering a probate estate, even what we in Michigan call an “informal, unsupervised” estate, expect filing fees, attorney fees (unless you make the unfortunate decision to “go it alone” and not engage legal counsel), and inventory fees that, again, at least in Michigan, the Probate Court levies upon the value of the estate.
Probate filing fees are currently just under $200, but inventory fees can range from several hundred to thousands of dollars. Attorney fees are all over the map for this kind of work, but at $350 plus per hour, the costs can roll up quickly. Even the most straightforward probate administration can take 15 to 20 hours in preparing the filings, meeting with and advising clients, preparing the inventory and accounting, preparing and mailing the proposed distribution and closing the estate. A typical probate administration can easily incur attorney fees ranging from $4000 to $8000. More complicated cases, or those in which family members do not agree, can cost even more.
In a nutshell, funding is simply the act of re-titling the your assets into the name of your trust. This gives your trust legal ownership and control of your assets. Don’t worry, though. Because you are likely to be the initial trustee, you control still everything.
There are some caveats in funding a trust, but most assets typically found in an estate can transferred to your trust with a minimum of hassle.
- Bank accounts can be changed to the name or the trust by presenting the trust, or certified extract of the trust, to the institution. Better still is to simply designate a POD (pay on death) or TOD (transfer on death) for the accounts naming the trust as the entity to receive the money when none of the account owners are alive.
- Real estate is generally conveyed to the trust by warranty deed. It is important to identify the trust as the grantee so that the trustee has marketable title. Note that this type of transfer, as with all transfers of real estate, must be accompanied by a property transfer affidavit filing with the local assessor within 45 days of the conveyance. Mortgage and land contracts may be transferred into the name of the trust by an assignment, but make sure the assignments are prepared in a recordable format and are, of course, recorded. It is also advisable to alert the insurance company of the change as well.
- Personal effects, furniture, furnishings. jewelry and other itemss of tangible property that have no certificate of ownership can be transferred into the trust using an “Assignment of Personal Property” document.
- If closely-held corporation stock is used to fund the trust, make sure you provide your attorney with the corporation bylaws and any buy-sell agreements for his or her review to ensure that there are no prohibitions against this type of Also, if the corporation is either an S-corporation or a Professional Corporation, there are special rules that need to be followed. Again, be sure to inform your of these situations so he or she can properly draft and implement your estate plan. It may be advisable for you to consider the use of a brokerge house to hold the stocks in an account.
- General Partnership or Limited Liability Company (LLC) interests can be assigned to your trust only if the partnership agreement or LLC operating agreement permits such transfers.
- Sole proprietorships may require a Bill of Sale or an Assignment of Interest that includes the goodwill of the business.
- At the very minimum, your attorney will almost certainly prepare a General Assignment of Assets to your trust. This document assigns all items of personal property that you own to your trust. Such an assignment is usually drafted very broadlu and is an especially useful trust funding tool, as it can often catch items of property that might otherwise “fall through the cracks,” items that you may have forgotten to tell your attorney about.
Whoever you choose to assist you to your estate planning project, be sure to ask him or her questions about your plan and, especially, to what extend your attorney will assist you in this most important aspect of helping to protect your family’s financial future.
Remember that an estate plan is not simply a “piece of paper.” It’s peace of mind. There is no better time than today to help secure your family’s financial future with a comprehensive estate plan.
I’d like to acknowledge Attorney Eric Lundquist, Jr., who contributed to this article.