What Does Funding a Trust Mean and How Is It Done?

A trust serves as a legal entity designed to hold and manage assets on behalf of beneficiaries. Its establishment creates a framework for asset administration and distribution. Funding a trust is the important step that transforms this legal framework into an active, functional instrument. Without this process, a trust cannot fulfill its purpose.

Understanding Trust Funding

Funding a trust involves the process of transferring ownership of an individual’s assets from their personal name into the legal name of their established trust. This transfer is a legally recognized change in title. For the trust to effectively control and administer assets according to its terms, it must legally own them.

This transfer enables the trust to achieve its objectives. One purpose is to help assets avoid the lengthy and public probate process upon the grantor’s passing. Properly funded trusts facilitate the seamless transfer of wealth, reducing administrative delays and maintaining privacy. Additionally, funding allows for professional management of assets, ensuring their continued growth and distribution to beneficiaries as outlined in the trust document.

Assets Commonly Used to Fund a Trust

A wide array of assets can be transferred into a trust. Real estate, including primary residences, vacation homes, or undeveloped land, is common for trust funding due to its value and to avoid probate. Transferring real property into a trust simplifies its distribution and management.

Financial accounts, such as checking accounts, savings accounts, brokerage accounts, and investment portfolios, are also often used to fund trusts. Placing these accounts into a trust ensures that liquid assets and investments are managed according to the trust’s provisions. Business interests, including shares in privately held companies or membership interests in limited liability companies, can also be assigned to a trust, providing continuity and a succession plan. Additionally, tangible personal property like art collections, jewelry, antiques, or entire household furnishings, can be assigned to a trust, especially if they hold monetary or sentimental value, ensuring their distribution.

Transferring Assets to a Trust

Transferring real estate into a trust requires the preparation and recording of a new deed. This involves executing a quitclaim deed or a warranty deed, which conveys the property’s title from the individual owner to the trust. The deed must identify the property by its legal description and state the trust as the new grantee. After execution and notarization, the deed must be recorded with the county recorder’s office in the jurisdiction where the property is located; recording fees range from $20 to $100.

For financial accounts, such as bank, brokerage, or investment accounts, the process involves directly contacting the respective financial institution. Account holders need to complete forms provided by the bank or brokerage firm to change the account title from their individual name to the trust’s name. A copy of the trust agreement or a certificate of trust is needed to verify the trust’s existence and the trustee’s authority. Some institutions may have administrative fees.

Tangible personal property without formal titles can be transferred to a trust through a General Assignment of Personal Property document. This document assigns ownership of items, such as household goods, artwork, or jewelry, from the individual to the trust. For items that do possess a formal title, such as vehicles, the process requires updating the title with the DMV. This involves submitting the original title, a copy of the trust document, and a completed transfer form, incurring a title transfer fee between $15 and $100.

Transferring business interests into a trust requires reviewing the governing documents, such as partnership agreements, corporate bylaws, or LLC operating agreements. These documents contain provisions regarding the transferability of ownership interests, such as requirements for consent from other owners or a right of first refusal. A formal assignment of interest document is then executed to transfer the ownership stake from the individual to the trust. This process ensures the business interest is managed and distributed according to the trust’s terms, providing continuity.

What Happens When a Trust is Not Funded

A consequence of failing to fund a trust is that any assets remaining in the individual’s name at their passing will be subject to probate. Probate is a court-supervised legal process that validates a will and oversees the distribution of a deceased person’s assets. This process can be lengthy, taking six months to two years, and can incur costs ranging from 3% to 7% of the estate’s value.

Additionally, probate is a public process, making details about assets, debts, and beneficiaries public record. Unfunded assets will not be managed or distributed according to the trust document’s terms.

Instead, these assets will be distributed either according to a valid will or by state intestacy laws. State intestacy laws provide a default distribution scheme, which may not align with the grantor’s intentions. Failing to fund a trust negates its primary benefits, leading to increased costs, delays, and a lack of control over asset distribution.