How to Properly Fund Your Trust and Common Mistakes to Avoid
Probate, the court supervised administration of your estate (assets) upon your death, can be an expensive and time consuming headache. For most people, one of the goals of their estate plan is avoiding probate. One way to avoid probate administration is to create a revocable trust and transfer appropriate assets to the trust during your lifetime. If the revocable trust is properly funded and administered, it will allow your assets to be distributed according to your instructions without any intervention or administration by the court. A revocable trust (which is also amendable by you during your life) is commonly referred to as a living trust or inter-vivos trust.
Not all assets are subject to probate administration. Upon your death, certain property passes outside of probate administration in accordance with beneficiary designations, pursuant to law or by contract (e.g., life insurance policies, real property held in joint tenancy, and joint bank accounts). Also, if you die with an estate containing assets worth less than $150,000 (other than assets properly titled in your living trust or non-probate assets such as life insurance policies discussed above) there are ways to distribute the assets to your heirs without court involvement. This article will not discuss these "small estate" alternatives.
If your estate is required to pass through probate because you have not properly funded your trust and the previous exceptions do not apply (or in the worst case scenario, you die without a will), it may turn out to be an expensive endeavor because your attorney will be paid a percentage of the value of your estate, and the process will take approximately nine months for an average estate in California. Many estates take even longer to complete the probate process.
Funding your trust with your assets is an important part of your estate plan, because it will assist you in avoiding probate. If the property is titled in your name as trustee at the time of your death, or the name of someone else acting as trustee of your trust, it will be distributed according to the terms of your trust without court intervention and with minimum attorney fees. It is important to note that you do not lose control of assets transferred to your living trust (assuming you are acting as trustee) during your lifetime.
The law generally classifies your assets into two categories: real property (i.e., land and structures on the land such as your home) and personal property (which includes everything not considered real property). The methods for funding (or transferring) your assets into your living trust are described below.
Real property can be placed into a living trust in four ways. Some methods are more efficient and less costly than others.
During your life you can record a deed with the county recorder where the real property is located that names the trustee of your trust as the owner of the real property. You can be the trustee and you can still sell or mortgage the property during your lifetime. Property held in the name of a trust at the time of your death is not subject to probate.
You can prepare and execute a will that specifies that all or part of your real estate (along with other personal property) is transferred into your trust at the time of your death. This type of will is referred to as a Pour-Over Will. This method requires that you create a trust for the assets to pour into. Also, probate administration is required because your will must be authenticated by the probate court establishing the court’s jurisdiction over the assets. Until the court authenticates the will, the assets cannot “pour over". This also means there will likely be a delay in getting the court’s order that your will is valid before your executor (the fiduciary in charge of your estate) may safely and properly distribute the property to the trust.
You can prepare a trust and either (1) include language in the trust that specifically refers to your real property as property of the trust, (2) prepare a schedule of property that is referred to in the trust and is attached to the trust at your death, or (3) execute a separate document during your life that states you are placing the real property into the trust. The real property must be sufficiently identified in the trust, schedule or document so that the court can identify the specific property. This method also requires some court involvement, as a court order is required to convey title to the real property into the trust. The time to receive an order is at least 90 days from the date a motion is filed with the court due to certain legal requirements and finding time on the court's calendar. You will be subject to court fees and attorney fees to transfer the property into the trust.
You can execute a will containing a “testamentary trust." A testamentary trust does not exist until your death and is created in the probate process by order of the court. As with a Pour Over Will, a will containing a “testamentary trust" must be authenticated by the Court. The process is approximately nine months and you will incur attorney fees to administer the process.
Funding your living trust with your personal property is similar to the methods described above, except deeds and recording are not used for personal property. For accounts and other holdings at financial institutions, such as banks and securities firms, that have not been transferred to your trust during your lifetime, it is often necessary to receive an order of the court to change title to these assets to your trust after your death.
The most common problems that occur when creating an estate plan or funding a trust, both during life and after death, are listed below.
The trust does not properly describe the property.
Assuming that referring to property in the trust, including a statement that a beneficiary is to receive specific property, is enough to properly transfer the property to the trust.
Executing a "pour-over" will but never creating a trust to receive the property from the will, or the trust is revoked prior to death.
Attaching a schedule of property to the trust that describes those items as property of the trust, but not specifically referring to the schedule in the trust.
Signing a pour-over will without proper execution formalities. A formal printed will must be witnessed by at least two witnesses who are not beneficiaries of the will. If only one of the witnesses to a will is not a beneficiary of the will, there is a presumption of undue influence in obtaining the signature of the person creating the will. This does not invalidate the will, but the presumption must be overcome to the court’s satisfaction.
Creating a holographic will (a handwritten will), but not putting the important parts in your handwriting, or forgetting to sign and date the holographic will. A holographic will is not valid if the portions describing and giving your property are computer printed and not handwritten. A holographic will also is not valid if it is missing both a date and a signature. Witnesses are not required for a holographic will, but they can be a significant help in proving the authenticity of the will to the probate court.
While an experienced estate planning attorney can prepare an estate plan for you that can avoid probate, it is the “one size fits all" computerized planning packages or “fill in the blanks" services that can cause your family additional stress after you have passed away. Poor preparation of an estate plan may even cause your estate to be distributed contrary to your intent. Therefore, it is extremely important to work with an attorney who understands your goals and intentions, can give you proper guidance as to the steps necessary to complete your estate plan, and will assist you in carrying out each step.