Close-up of stacked coins and piggy bank against green bokeh background. Concept for blog: What Does it Mean to Fund a Trust?

A trust is a crucial estate planning tool that can help ensure your wishes are carried out not only upon your passing, but also during your lifetime. When properly set up, a trust can avoid probate, allow you to remain in control of your assets, and save your loved ones a substantial amount of estate taxes. However, it’s important to understand that unlike a will, a trust isn’t just a document. In addition to drafting the written instrument, the trust needs to be funded — failure to do so can mean the instructions in the trust will not be followed and probate may not be avoided. But what does funding a trust mean?

What is a Trust?

A trust is a legal arrangement set up by the grantor that allows a third party called a trustee to hold assets on behalf of a beneficiary. It allows you to have a level of control when it comes to your estate plan that a last will and testament would not be able to provide. Trusts can be specifically customized to protect and preserve your assets and allow you to regulate how your wealth is distributed.

There are many different types of trusts that can be used, depending on your objectives, including the following:

  • Revocable trusts — A revocable trust can specify how your assets will be distributed upon your passing, as well as provide protection in the event of incapacitation. This type of trust can be changed at any time, but there are no tax benefits or protection from creditors.
  • Irrevocable trusts — An irrevocable trust is one that the grantor cannot revoke or modify since the grantor gives up their right to control the assets in the trust. Although they are less flexible than revocable trusts, these types of trusts have several benefits, including protecting assets from creditors, giving the beneficiary the ability to access government benefits, and minimizing estate taxes.
  • Testamentary trusts — A testamentary trust is one that is established by the instructions in a last will and testament. It is created after the will has gone through the probate process.
  • Supplemental needs trusts — Special needs trusts can be used to help provide for a loved one with disabilities while still preserving their eligibility for government benefits.
  • Charitable trusts — A charitable trust is one that is created to provide for a charity of your choice. These types of trusts can also be set up as charitable remainder trusts, which distribute assets to your named beneficiaries first, and any remaining assets to a charity.
  • Pet trusts — A pet trust can be used to provide for the care of a companion animal after the grantor’s passing.

Regardless of which type of trust you intend to set up to meet your objectives, it must be funded. Although funding a trust is not difficult, it can take some time to complete the process.

How Can a Trust Be Funded?

No matter how well-drafted a trust instrument might be, the instructions are irrelevant if the trust is not funded. Funding a trust involves transferring assets or property into it. If the trust does not contain any assets or property, numerous difficulties can arise when you pass away or become incapacitated. If a trust is not funded with property, it is simply a document that does not control anything.

Depending on the type of trust and your specific goals, a wide variety of assets may be used to fund the trust, including the following:

  • Bank accounts
  • Certificates of deposit
  • Securities
  • Real estate
  • Personal property
  • Art and jewelry
  • Business interests
  • Life insurance

It’s essential to work closely with your attorney to determine which of your assets should be used for funding a trust. Critically, tax-deferred assets such as retirement accounts can also be used to fund certain trusts — but this could have undesired tax implications. A skillful estate planning attorney can discuss your specific situation and best advise you regarding the issue of funding your trust to ensure your wishes are carried out.

How to Transfer Property into a Trust

As the grantor, you are responsible to fund the trust. This involves taking the necessary steps to transfer property and assets into it. How property is transferred into the trust depends on the specific asset. Assets that are outside the trust may pass through intestate succession if they were not specified in your will. In other words, the assets would be distributed in accordance with state law, which may result in consequences you had not intended.

Titled property can be transferred by creating a new title and naming the trust as the owner. Any assets that have not been retitled in the name of the trust would be required to go through the probate process. This would ultimately defeat the purpose of having created a trust. Similarly, untitled property can be moved into a trust with a document called an “assignment of property,” designating the trust as the owner. If these assets are not properly moved into the trust, they would be held outside the trust — and the terms of the trust instrument would be inapplicable.

Some title changes are as easy as signing new paperwork. However, those involving real estate may require preparing and recording a new deed. In addition, some financial institutions may want verification that your trust exists. In such cases, your attorney may need to prepare a certificate of trust.

Contact an Experienced Minnesota Trusts and Estates Attorney

Estate planning can be complex. It’s essential to have a knowledgeable attorney by your side to help ensure your goals are met. Located in Maple Grove, Mundahl Law works with clients throughout Minnesota for all their estate planning needs. To learn more about creating and funding a trust, or to schedule an appointment, contact Mundahl Law at 763-575-7930.

Categories: Estate Planning