Creating a trust can be a smart way to help protect assets and provide for heirs — if you fund it correctly by titling assets to the trust.
A trust can be a valuable strategy in your estate plan. Establishing a trust helps avoid probate (the legal process to establish the validity of a will) while providing for your loved ones and ensuring that your wealth is distributed as you wish. But if you fail to transfer assets to the trust by retitling them in the name of the trust, your estate plan may not work as intended.
“One of the biggest mistakes I see clients make is not titling assets correctly,” says Travis Bartee, senior trust advisor with Wells Fargo Bank, N.A. “Missing that crucial step may likely circumvent your estate plan.”
Here, Bartee shares the basics of trusts and the importance of funding a trust as well as how to do it and when to revisit your plan.
First things first: What is a trust?
A trust can be revocable or irrevocable. It is a legal arrangement where the grantor, the person who establishes the trust and decides what assets will fund the trust, gives control of the assets to a trustee, such as a bank, to hold those assets for the benefit of the beneficiary of the trust. A beneficiary may be one or more persons or a charity. The trustee has a legal obligation to manage and distribute the assets according to the terms of the trust for the benefit of the beneficiaries of the trust.
One of the biggest benefits of a trust is that it can avoid the probate process — the legal proceeding that establishes the validity of the will. (Probate can be a lengthy process, depending on the assets involved, the creditor claims period, and whether the will is disputed). But it has other benefits too. For starters, an irrevocable trust can help reduce the value of an estate for estate tax purposes. The assets titled in the name of the trust are no longer considered part of your taxable estate if the trust is properly funded and other conditions are met. “When the current estate tax exemption sunsets in 2025 and reverts back to the previous exemption amount of $5 million per person (indexed for inflation), proper planning and titling will be even more important,” Bartee says.
By avoiding probate, a trust also helps ensure privacy and security for your heirs and assets. “You don’t want to provide an opportunity for creditors, estranged family members, or strangers to see your will or your wealth,” Bartee says. “A will is a matter of public record. Anyone can pull it up and see exactly what your heirs inherited.” Typically, the terms of a trust are not made a matter of public record. Therefore, names of beneficiaries and assets are shielded from prying eyes.
Trusts also provide another kind of security: Trust assets held by a bank acting as an institutional trustee are separated from the bank’s own assets. The trust assets are not commingled but are accounted for separately in the name of an individual’s trust. This means the trust assets are not subject to the bank’s creditors, which can be reassuring to know, especially during times of economic uncertainty — like the Great Recession.
How to properly title your assets to fund a trust
Many types of assets can be used to fund a trust, from deposit and savings accounts to real estate and business holdings. However, simply creating the trust and indicating which assets you would like to include in the trust is not enough. You must take the additional step of titling the assets in the name of the trust (or changing the beneficiary designation to the trust) so that the trust “owns” the asset and the trustee has control over the assets — otherwise, it remains part of the grantor’s original estate. For example: If you would like to include your life insurance payout in the trust, you need to make sure the trust is deemed the owner of the policy or named as the policy’s beneficiary. That is something many people forget to do, and after your death, there is nothing your heirs can do about it.
Why is retitling and proper beneficiary designation so important? “Let’s say you have a life insurance policy with your spouse as the beneficiary and you get divorced. You then change your will or trust to say your children will get your life insurance,” Bartee says. “But you fail to change the beneficiary designation or retitle ownership from your former spouse. When you die, that life insurance won’t go to your children. It goes to your former spouse, which is clearly not your intent.”
As part of the planning process, you will want to work with your advisor who can help you determine the assets you want to retitle. It helps, Bartee says, if you have a list of your assets — such as life insurance, bank accounts, real property, and stocks — a financial inventory showing how those assets are titled and what the beneficiary designations are on those assets. That way, if anything needs to be changed, you can do it right away. Retitling may be as easy as filling out a form or recording a new deed.
You should consult with an experienced estate planning attorney, who can draft the necessary legal documents to accomplish your goals. If your plan utilizes a revocable trust, be sure to ask about a “pour-over” will, Bartee advises. “A pour-over will is a will that states, at your death, any assets that are deemed probate assets (assets you did not retitle to your trust or have beneficiary designations for) will be ‘poured’ into your trust.” It will not avoid probate, but this helps ensure that any property you may have forgotten to retitle ends up in the trust.
How often to review a trust and assets
Bartee recommends reviewing estate planning documents, including your will, trusts, powers of attorney, deeds, and beneficiary designations, annually.
Why? Often, he says, clients acquire new assets and forget to title them in the name of the trust. Or there may be life events that need to be accounted for — for example, if you get a divorce, or if you’ve remarried, you will want to make sure your kids and any family legacy items, like heirlooms or property, are protected.
“You go see your doctor and get a physical every year.” Bartee says. “We recommend you do the same thing for your finances — a financial check-in with your advisors.”
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Wells Fargo Bank, N.A., is a bank affiliate of Wells Fargo & Company.