If a trust is part of your estate plan, congratulations! You have taken a big step towards making sure that your assets will be managed and distributed in accordance with your wishes. But just having a trust agreement in place is not the end of the story. Once your trust has been established by executing the agreement ownership of your assets need to be transferred to the trustee. A trust without assets is like an empty treasure chest.
For your trust to accomplish your goals efficiently and effectively it must be funded during your lifetime. A trust is funded by transferring assets out of the your individual name or out of joint ownership and into the trust.
Let’s look at an example: After meeting with their estate planning lawyer from Semmelman & Semmelman, Ltd. John and Mary Smith, husband and wife, each executed a trust agreement on May 1, 2012. John and Mary are the trustees of John’s trust and Mary is the trustee of her own trust. John and Mary have two children whom they are putting through college. At the time John and Mary executed their trust agreements they owned a home in Lake Bluff and a securities account at a major brokerage house. Both of those assets were held in joint tenancy. John passed away on January 5, 2014. Mary passed away on February 4, 2015.
(a) What would happen if John and Mary did not transfer the ownership of the home and the investment account to their trusts?
When John passed away ownership of the home and the investment account
passed to Mary by virtue of the joint tenancy. When Mary passed away the home and stock portfolio became part of her taxable estate. Title to the assets will pass to Mary’s probate estate and those assets will not be available to pay for the education of John and Mary’s children for a period of time. While the assets are in the probate estate they are subject to the claim of creditors. When the executor is finally able to transfer the assets into the trust they will need to be retitled in the name of the trustee.
If John and Mary had properly funded their trusts during their lifetime, probate could have been avoided all together.
(b) What would happen if Mary’s trust was not funded and she became disabled after John died to the point where she was unable to handle her own affairs?
One of the children or some other agency would need to file a petition for guardianship asking the court to appoint a guardian over Mary’s property. The person appointed as Mary’s guardian may not be the person whom she would have chosen to be in charge of her finances.
If Mary had properly funded her trust it would not have been necessary for the court to appoint a guardian over her property. Instead, when Mary became disabled the successor trustee, who was previously chosen by Mary, would have been able to step in and manage those assets on her behalf.
Having a trust agreement and neglecting to fund the trust is like buying a shiny new car and not putting gas in the tank. It might look good sitting in the driveway but it will not get you where you want to go.