Episode 11: How to Fund a Revocable Trust

Estate Planning Lawyer, Peter Klenk

How to Fund a Revocable Trust

Everybody, let’s talk about how to fund a revocable trust. This is something that comes up quite often with clients because people have heard about revocable trust and they say, “Oh, I’m gonna avoid probate. I like the idea of that.” But the execution of using the revocable trust is often overlooked, and this is very important because you can spend a lot of money setting up a revocable trust, but if it’s not funded, you haven’t done a thing.

So let’s talk about some basics and an introduction. If you’ve heard my other podcasts on this subject, you have a good idea of what a revocable trust is. But for those who are listening for the first time, let’s do a quick rundown. A revocable trust is a trust that’s revocable; it doesn’t help you with taxes, avoiding divorce, or creditors. It helps with avoiding probate, and that’s the primary purpose of the revocable trust.

You form the trust by having a grantor, which would be you, and you grant the power to a trustee, also you, who is going to hold an asset for the beneficiary, who in a revocable trust situation is also you. You’re all three roles: the grantor, the trustee, and the beneficiary. It’s a real entity that exists and can own various assets like real estate, bank accounts, and more. But it’s revocable, meaning you can always modify it and change it over time.

Now, how do you fund this? Let’s say you’ve formed your revocable trust; it exists. It’s sitting there by signing it. That’s nice, but here’s a little segue. A lot of times people see the list in the back and it says, “List the assets in the revocable trust.” I think these are a little bit of a trap because just writing something on a piece of paper doesn’t mean it’s owned by the trust. You actually have to go through a process to get it in the trust.

Let’s think about your house. It’s a very typical thing to put into a revocable trust. To do this, you need a new deed that says you’re moving all your rights and this property into the revocable trust. This new deed needs to be filed with the county and registered by the Register of Deeds so that it’s public knowledge that the property is now owned by the trust.

If you have other properties like rental properties, each of them also needs a new deed to be moved into the trust. If any of them are not moved in, when you pass away, they won’t be owned by the trust, and you’ll still need to file the will to get control over that property.

Another thing you have to consider are your bank accounts and investment accounts. These can be moved into the trust, and you can do this by opening new accounts in the name of the trust or by naming the trust as the beneficiary. The choice depends on your preferences.

Life insurance can also be managed through beneficiary designations, so you usually don’t need to move the policy into the trust. You just name the revocable trust as the beneficiary.

However, it’s important to note that qualified plans like IRAs, 401(k)s, and 403(b)s should not be moved into the trust while you’re alive due to potential tax consequences. Always consult your financial advisor or accountant for guidance on this matter.

In conclusion, setting up a revocable trust is a critical step in estate planning, but it’s equally important to ensure that it’s properly funded with your assets. Make sure everything is done correctly and that you consult with professionals if needed to ensure your wishes are carried out effectively.