Trusts can be used for different purposes, including probate avoidance and asset protection. We are often asked about how and when to fund a trust.
First, as to the “how” question: A common misconception is that assets can be transferred to a trust simply by listing the assets on “Schedule A” attached to the trust agreement. The Schedule A is really nothing more than a record keeping tool to help the trustee keep track of what has been put in the trust. But simply listing something on Schedule A does not actually put anything in the trust. Other actions are required to transfer legal title of property to a trust.
Liquid assets (cash and uncertificated securities) are assets of a trust if they are in accounts held in the name and under the federal tax identification number of the trust. If the asset has a certificate of title (such as vehicles, savings bonds, and certificated securities), the certificate of title must list the trust as the owner. The same is true of real estate, which requires a deed to complete the transfer of legal title to the trust. Interests in business entities (such as closely held corporations, partnerships, and limited liability companies), can be transferred via a document called an assignment. Assignments are also useful tools in transferring untitled tangible personal property (such as jewelry, furnishings, artwork, and other household contents).
We typically complete the Schedule A in a way which includes only property which we know has been successfully added to the trust by a method mentioned above. We rarely include property which our client merely intends to put in the trust later, as doing so could lead to confusion or misunderstanding on what is actually in the trust.
Now on to the “when” question: The simple answer is that it depends on the objectives of those involved in the transaction. Some trusts – known as testamentary trusts – are created under wills and cannot be funded until there has been a death and probate of the will. Other trusts – known as inter-vivos trusts – are created during lifetime, and can be funded either during lifetime (by one method described above) or after death (via a separately executed beneficiary designation or by directive in the deceased’s will). Some of our clients prefer to transfer property to an inter-vivos trust, during lifetime, to achieve peace of mind in knowing the funding of the trust is complete. But this involves some time and expense, which leads others to defer funding to a later date.
Regardless of when a trust is funded, good record keeping is a must. Establish a clear and unambiguous paper trail of the trust agreement and amendments, all trust accounts, instruments of transfer, and tax returns for the trust. Store the trust’s documentation in a location where it can be found by the successor trustee after you become disabled or are deceased. Those who may later administer the trust will appreciate the care and attention that you have given to ensure that the trust administration goes smoothly even after you are unable to oversee it.