How to Properly Fund an Irrevocable Trust

Funding an irrevocable trust involves transferring ownership of assets from an individual to the trust itself. This action activates the trust’s legal existence and its intended benefits, distinct from merely creating the trust document. The primary purpose is to achieve estate planning objectives, such as safeguarding assets from creditors, ensuring assets bypass probate, or facilitating charitable giving. By relinquishing control, the grantor establishes a structure to protect and manage wealth for beneficiaries according to predetermined terms.

Gathering Information for Funding

Before initiating asset transfers, gather specific information and relevant documents. The finalized irrevocable trust document is paramount, outlining the trust’s legal name, trustee’s identity, and instructions for asset management. This document dictates the precise titling required for all transferred assets. Identifying all assets intended for transfer is a crucial preparatory step. For real estate, collect the legal description and physical address. Bank accounts require account numbers and financial institution names, while investment accounts need brokerage firm details, account numbers, and investment types. For life insurance policies, the policy number and company name are necessary. Business interests, such as LLC membership interests or stock in closely held corporations, demand specific ownership documentation. Gather accurate details for each asset, along with the full legal names and addresses of all trustees.

Transferring Different Asset Types

Transferring assets into an irrevocable trust requires specific procedural steps tailored to each asset type. This ensures legal ownership is correctly shifted to the trust, activating its ability to manage and protect assets. Accurate completion of all forms and proper titling are essential for the trust to function as intended.

Real Estate

For real estate, prepare and record a new deed, such as a quitclaim or warranty deed. This deed transfers ownership from the grantor to the trustee of the irrevocable trust, designating the trust as the grantee. After signing and notarizing, file the deed with the county recorder’s office where the property is located.

Retitling Bank Accounts

Retitling bank accounts necessitates a visit to the financial institution. The bank will require a copy of the trust document, and new account agreements must be signed, establishing the trust as the account’s new owner. Many banks have specific trust transfer forms or a “Certificate of Trust” for this purpose.

Investment Accounts

Investment accounts, including brokerage accounts, mutual funds, stocks, and bonds, are transferred by contacting the respective firm. This involves completing their transfer forms and providing a copy of the trust document. The firm will then retitle the account to reflect the trust as the new owner.

Life Insurance Policies

Life insurance policies involve changing both ownership and beneficiary designation to the trust. Contact the insurance company and complete their forms for ownership assignment and beneficiary change. If the trust purchases a new policy, the trustee should be the initial applicant, owner, and beneficiary.

Business Interests

For business interests like LLC membership interests or stock in closely held corporations, transfer usually involves preparing an assignment of interest or a stock certificate transfer. This complex process may require reviewing the company’s operating agreement or bylaws and securing approval from other partners or shareholders. Consulting legal counsel is advisable to ensure compliance with governing documents.

Tangible Personal Property

Tangible personal property, such as jewelry, art, or furniture, can be transferred to the trust using a general assignment document or a bill of sale. This document lists the items and formally states their ownership is now vested in the trust. Keep this document with the trust’s records.

Tax Implications of Funding

Transferring assets to an irrevocable trust carries specific tax considerations. Such a transfer is considered a completed gift, which can trigger gift tax implications. The Internal Revenue Service (IRS) provides an annual gift tax exclusion, which for 2025 is $19,000 per recipient.

Gifts exceeding this annual exclusion amount will use up the grantor’s lifetime gift tax exemption. For 2025, the lifetime gift and estate tax exemption is $13.99 million per individual, allowing a married couple to collectively shield up to $27.98 million from federal gift and estate taxes. If gifts exceed the annual exclusion, even if no tax is immediately owed, the transfer must be reported to the IRS by filing Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return.

Funding an irrevocable trust can also impact the step-up in basis for inherited assets. Assets held in a non-grantor irrevocable trust do not receive a step-up in basis to fair market value upon the grantor’s death, unlike assets included in the grantor’s taxable estate. This means beneficiaries might face higher capital gains taxes if they sell the assets later. Conversely, if the trust is structured as a grantor trust for income tax purposes, the assets may still be considered part of the grantor’s estate for income tax basis purposes, potentially allowing for a step-up in basis.

Assets transferred to an irrevocable trust might still be included in the grantor’s taxable estate for estate tax purposes under certain circumstances. This can occur if the grantor retains specific powers or interests in the trust, such as the right to receive income or change beneficiaries, even if the trust is technically irrevocable. Ensure the grantor relinquishes all “incidents of ownership” to remove assets from the taxable estate.

For real estate transfers, funding an irrevocable trust could trigger a property tax reassessment in some jurisdictions. While many states offer exemptions for transfers between certain family members or to trusts where the grantor retains a beneficial interest, others may consider the transfer a change in ownership, leading to property revaluation for tax purposes. Rules vary widely by state and local municipality. Consulting a qualified tax professional or an estate planning attorney is recommended to ensure proper planning and compliance.