An Unfunded Trust Isn’t Worth the Paper It’s Printed On

The creation of a trust is a powerful and necessary step to providing for your loved ones. As the grantor—also called a settlor or trustmaker—it falls to you to transfer the appropriate assets into the trust. Unfortunately, this is the exact point where many estate plans fail. If you told your attorney you would handle the funding, bought a trust document online, or just don’t have the time to complete the transaction, you are keeping your family’s future in limbo.

If we’ve said it once, we’ve said it a million times: It is VITAL that you fund your trust AS SOON AS POSSIBLE. If you haven’t already done so, here are three reasons you should fund your trust TODAY:

  • The cost can probably be much less than probate. Revocable trust planning is a good option for anyone whose estate is valued at more than a few hundred thousand dollars. In Florida, the probate fee is 3% on estates valued between $100,000 and $1,000,000. To put this in context, the fee to probate a $500,000 estate is $15,000. The fees scale as the size of the estate increases—the probate fee on a $3M estate rockets to a minimum of $60,000. The more you have, the more you have to lose.
  • It can help keep your creditors guessing. If there’s nothing funded into your trust, your assets will still have to go through probate if you pass away. While the actual documents involved are not made public, the existence of the probate case is available for anyone to see. Most businesses and creditors have probate alerts set up for their debtors, so they can easily come looking for their share of your estate.
  • We can make it simple and secure. When we handle your estate planning, we always offer to take your plan through funding to ensure that you are protected. If you would rather fund the estate yourself, we give you detailed written instructions on how to transfer different kinds of assets into a trust to simplify the process.

There is nothing wrong with self-funding a trust, but it is a complicated process that must be done in accordance with the law. If you own considerable real estate, you may need to work with your title company or a real estate attorney at some point in the procedure, and all documents must be filed properly with the county. Considering what is at stake, it is usually best to have an estate planning attorney fund your trust on your behalf.

Example 1: Trustees vs. Powers of Attorney

Some people choose to create durable powers of attorney (POA) as extra protection against incapacity. While this may be a good option, it depends on what your specific goals are and what responsibilities you want to give your agent. A POA gives your agent control of assets that are purposely not included in your trust—such as life insurance, retirement accounts, or government benefits.

Keep in mind that a limited POA gives your agent control over matters listed in the document, while a general POA allows full control of your affairs. Also, Florida POAs go into effect immediately after signing and expire after the death of the principal, so your agent will lose his or her authority in the event of your death.

In contrast, a successor trustee’s authority often begins after your death and continues until the trust is dissolved. BUT, a successor trustee can also act if you become incapacitated. It is important to note that the trustee’s powers are limited to the assets titled in the name of the trust. If the trust is not funded with LLC membership interests, patents, and other business interests, your trustee will have no authority over those assets.

Example 2: What Happens If the Grantor Is a Licensed Professional?

We talk a lot about what your trust can do, so let’s talk about what it can’t do. For instance, I once had a client who ran a successful dentistry office and named his wife as the successor trustee in his revocable living trust. However, his wife isn’t a medical professional. If he were incapacitated, she cannot step in and perform extractions and fillings on her husband’s behalf. So what happens if the grantor is the only person who can perform the essential functions of the business?

If the successor trustee does not have the same credentials as the grantor, the trustee may need a corporate POA to perform business administration (such as payroll, ordering, and hiring) so they can bring in a substitute professional while the grantor is incapacitated. Since both limited and general powers of attorney expire upon the death of the principal, the corporate trust must also include a strong succession plan.

Example 3: Irrevocable Trusts Must Be Funded as Well

Irrevocable trusts come in all different flavors and serve a variety of purposes, but these trusts have to be funded as well. The type of trust you will ultimately use depends on your situation and what you are trying to achieve. An irrevocable life insurance trust (ILIT) can offer tax benefits and protects insurance proceeds from being collected by creditors or used to pay court judgments. A spousal lifetime access trust (SLAT) can be used by married couples to provide assets and income to one spouse without counting toward the beneficiary spouse’s gross estate. A charitable remainder trust (CRT) can generate a potential income stream for beneficiaries, with the remainder of the donated assets going to charity. If irrevocable trusts are not legally funded, they may be subject to increased taxation and debt collection, defeating the purpose of creating the trust in the first place.

Don’t Put Off Until Tomorrow What We Can Do Today

At Yolofsky Law, our trusted advisors listen carefully to your goals and advise you on the best way to make them a reality. Call our office today to learn more about finding your trust and get answers to your questions.