Your estate planning is complete. A living trust was created because it was the best vehicle to accomplish what you want to do. Now you can breathe easily. Or so you think.
Over the years, I’ve had new clients come to me who had invested lots of time and money to set up a trust. But when I asked if everything had been put into the trust, I got one of two reactions. The first was a quizzical look because they didn’t know what I was talking about. The other was a sheepish look because they knew what they were supposed to do and just hadn’t done it.
The biggest mistake of having a living trust is having an empty trust. If you don’t put anything in, the benefit of the trust is wiped out. That can be costly to you and the people you want to benefit. Funding a trust is simply transferring property to the trust or designating the trust as a beneficiary.
Any property you own—your primary residence, a vacation home, timeshare, rental property, undeveloped land, etc.—can be reregistered in the name of the trust. Often times this is done using a quitclaim deed. The end result—the trust becomes the owner of the property and moves into the trust. Once you’ve executed the documents for reregistration, don’t just assume it happens. Follow up to make sure.
Reregistering financial accounts will require some paperwork. The bank or investment company will have their own forms, plus you’ll be asked for a copy of the trust to confirm the proper registration and the details. As with transferring property, don’t assume the change happens. Follow up to make sure.
Annuities and life insurance
With insurance products, there are several categories to consider. Who will be the insured or annuitant, the owner, the primary beneficiary(s), and the contingent beneficiaries? It’s important that you talk with a financial or tax professional who has experience in this area to make sure that the trust or the people you name in all those categories are correct for your situation. Don’t assume that naming the trust as the primary beneficiary will achieve your estate planning and tax planning goals.
Insurance companies will have their own paperwork required to reregister your annuities or life insurance and will most likely ask for a copy of the trust as well.
IRAs and Retirement plans
IRAs and retirement plans have to be treated differently when deciding if a trust should be a primary or contingent beneficiary. In some cases, naming the trust can cause tax problems for anyone inheriting your IRA or retirement plan.
Listing the trust as beneficiary instead of naming individuals can limit the flexibility of how distributions are made to trust beneficiaries.
Often the reason for naming a trust as the beneficiary of an IRA or retirement plan is to protect it from creditors, a spendthrift heir or to help a special needs beneficiary. That’s why it’s important to consult a professional, knowledgeable in this area. What you spend for their advice can save you and your loved ones in the long run.
Bottom line: an empty trust is like having no trust at all.