Funding a Living Trust: The Step That Makes It Work

A living trust controls exactly one thing: the assets that have actually been transferred into it. Everything else you own passes as though the trust did not exist.

This is where most trust plans fail, and they fail quietly. The document gets signed, the folder looks impressive, the funding list never gets worked through, and the family discovers it years later in Surrogate’s Court, having paid for a plan that was never switched on.

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What funding actually means

Retitling. Changing the owner of an asset from your name to the name of the trust, or in some cases naming the trust as beneficiary.

It is administrative rather than difficult. What it is not is automatic, and nobody does it for you unless you have specifically hired somebody to.

Real property

The big one, and the one most often left undone.

Transferring a New York property into a trust requires a new deed, prepared correctly, executed and recorded. An unrecorded deed sitting in a folder does not fund the trust, and it creates the same problems any unrecorded deed creates. See why recording matters.

Before you do it, check three things with your attorney: whether your mortgage has a due on sale clause and whether the lender needs to be notified, how the transfer affects your STAR or other property tax exemptions, and how your title insurance is affected.

Co ops are their own situation, because you own shares and a proprietary lease rather than real property, and the co op board’s consent is usually required. Expect that to take time.

We handle the notarization and the ACRIS recording once the deed is prepared.

Bank and brokerage accounts

Contact each institution and ask for their trust retitling process. Most have a form and will want a certification or abstract of trust rather than the full document.

Ask your attorney to prepare that certification at the same time as the trust. It confirms the trust exists and who may act without handing a bank teller your entire estate plan.

Do this account by account and tick them off a written list. Accounts opened after the trust was signed are the ones that get missed.

Retirement accounts: do not retitle

Important, because getting this wrong is expensive.

Retirement accounts are generally not transferred into a living trust. Retitling one can be treated as a distribution with immediate tax consequences.

What you may do, depending on your plan, is review the beneficiary designation. Whether a trust should be named as beneficiary of a retirement account is a genuinely technical question with tax consequences, and it needs an attorney or a qualified adviser rather than a form.

Life insurance, business interests and personal property

Life insurance is usually handled through the beneficiary designation rather than by retitling the policy.

Business interests, meaning LLC membership interests, partnership interests or shares in a closely held company, often can be transferred, but the operating agreement or shareholder agreement may restrict it. Read the agreement before assuming.

Vehicles, valuables and general personal property are often handled by an assignment of personal property signed alongside the trust. Titled vehicles have their own process through the DMV.

Keep funding as you go

Funding is not a one afternoon task that ends. It is a habit.

Every time you open an account, buy property, or acquire something significant, ask whether it belongs in the trust. Review the list annually and after any major purchase, sale, move or inheritance.

This is the discipline nobody mentions when the trust is sold, and it is the difference between a plan that works and a document that does not.

The pour over will is a safety net, not a plan

Almost every trust plan includes a pour over will directing anything left in your name into the trust at death.

Useful, and frequently misunderstood. Assets caught by a pour over will generally still go through probate on the way in. So the pour over will catches the strays; it does not undo a failure to fund.

If avoiding probate was the reason you set up the trust, funding it is the reason it works.

A funding checklist you can actually work through

Write it down and tick things off. A trust plan lives or dies on this list existing somewhere other than in your head.

Real property, one line per property, with a note of whether the deed has been prepared, executed and recorded. Bank accounts, one line each. Brokerage and investment accounts. Certificates of deposit. Business interests, with a note on whether the operating agreement permits transfer. Safe deposit boxes. Vehicles and boats. Valuables covered by an assignment of personal property. Any loans owed to you.

Then a second list of things deliberately left out, with the reason: retirement accounts, life insurance, anything with a beneficiary designation. That second list is what stops a future you, or your successor trustee, from wondering whether something was forgotten.

Tell your successor trustee where it all is

The person who takes over needs the trust document, the funding list, the account details and the location of the deeds.

Families lose more time to nobody knowing what exists than to any legal complexity. Give the successor trustee a copy of the trust and the list, and update it when the list changes.

Signs your trust is not funded

Your deed still shows your name alone. Your bank statements still arrive in your personal name with no reference to the trust. You have never been asked for a certification of trust by any institution. You cannot name three assets that are inside it.

Any of those and the plan is not doing what you paid for. It is fixable, and it is far cheaper to fix now than for your family to discover it later.

What it costs to fund, roughly

Worth budgeting for, because people are quoted a price for the trust and assume that is the whole cost.

Real property is the expensive part: a deed to prepare, plus New York City and State filing requirements and recording fees, and the associated forms. Even a transfer for no money generally requires the tax forms and the filing fee. See how recording costs work.

Accounts are usually free to retitle, costing only your time and a certification of trust. Business interests may involve legal work if the operating agreement needs amending.

Ask whoever drafts your trust one direct question: is funding included in your fee, and if not, what will it cost? A trust quoted cheaply with funding excluded is not cheaper. It is unfinished.

Funding a Living Trust: The Step Everyone Skips