Setting up a trust is an excellent way to manage and protect your assets, but creating the trust is just the first step. To make the trust effective, you need to “fund” it. If you’re scratching your head at this point, don’t worry. We’ll break it down for you.
Funding a trust means connecting your assets to your trust so they transfer to the trust when you pass away, avoiding probate. Think of an unfunded trust as an empty bucket. To make the bucket useful, you need to fill it with your belongings—whether those are tangible items like real estate or intangible ones like financial accounts. The key distinction: you name the trust itself as the beneficiary (using your trust name), not the trustee.
Why Is It Important?
An unfunded trust doesn’t accomplish much. Assets not properly connected to your trust will go through probate—a process that typically costs 3-7% of your estate value and takes 1-2 years to complete. Additionally, the terms of your trust won’t apply to assets that aren’t properly funded, potentially creating confusion or challenges for your loved ones.
Proper trust funding ensures that everything runs smoothly and aligns with your estate planning goals.
Common Types of Assets
While not every asset is eligible or practical to put in a trust, many can—and do—benefit from trust funding. Here are some common examples of what goes in trusts:
- Real Estate: Your home or other properties.
- Financial Accounts: This includes bank accounts, investment portfolios, and retirement accounts. Some account types (like IRAs) require special considerations.
- Personal Property: Valuable items such as jewelry, art collections, or family heirlooms.
- Business Interests: Ownership stakes in a business to ensure continuity and proper management.
- Life Insurance Policies: Life insurance policies themselves are not for trusts in terms of funding. However, you can name the trust as a beneficiary of life insurance proceeds.
How Do You Fund a Trust?
Trust funding methods vary by asset type. Different assets use different approaches:
- Personal property: Automatically funded through the trust document—no additional action needed
- Bank accounts: POD (Payable on Death) forms at your bank
- Investment accounts: TOD (Transfer on Death) forms at your brokerage
- Real estate: State-specific TOD deeds or transfer documents filed at the county recorder
- Vehicles: State-specific title transfers at the DMV
Each asset requires specific documentation and sometimes coordination with financial institutions. Platforms like SimplyTrust provide detailed funding instructions for each asset after you complete your trust.
What Happens If You Don’t Fund a Trust?
Unfunded assets go through probate—expensive, slow, and public. This means your estate faces the same hurdles you were trying to avoid in the first place. Additionally, your carefully crafted trust instructions won’t apply to unfunded assets, leaving your loved ones without the guidance you intended them to have.
Understanding Trust Funding
Funding a trust might seem technical, but it’s a crucial step in your estate planning journey. Taking the time to properly connect your assets to your trust ensures the trust operates effectively, providing peace of mind for you and your loved ones. A trust can only work as intended when properly funded—making this step essential to achieving your estate planning goals.