CONTRIBUTED CONTENT: The empty trust problem

Last month I had an experience I’ve had too many times in my practice. A client brought me a beautifully drafted revocable living trust her family had paid good money for years earlier. The document was excellently written. It was also, in every practical sense, empty and therefore useless. Not a single asset had ever been transferred into it — which meant her estate was headed straight for the probate court her family had been told they were avoiding. This is the most common failure we see in estate planning, and it has a name: an unfunded trust.

What Funding Means

A trust only controls what it actually owns. Signing the document creates the container; funding is the separate work of retitling assets into it, so that the owner of record becomes the trust rather than you individually.

Anything left in your personal name at death is outside the trust. Most trust-based plans include a pour-over will that sweeps stray assets in afterward — but that sweep happens through probate, which is precisely what the trust was meant to sidestep. A pour-over will is a safety net, not a substitute for funding.

What Goes In, and How

• Real property. Requires a new deed, properly drafted and recorded with the county recorder where the property sits. This is the single most important transfer for most Idaho families, and the one most often left undone.

• Bank and brokerage accounts. Retitled into the trust's name, unless you have decided to use Pay on Death/Transfer on Death Agreements to direct the outcome of these accounts – about which your lawyer can give you guidance.

• Business interests. LLC membership units and closely held shares transfer by assignment — but check the operating agreement first, since many contain restrictions on transferability.

What Stays Out

Funding is not indiscriminate, and a few categories should generally not be retitled (though there can be exceptions to these general rules, so speak to your attorney):

• Retirement accounts. Do not transfer an IRA or 401(k) into a trust during your lifetime — it can be treated as a taxable distribution. Coordinate through the beneficiary designation instead. Naming your trust as the beneficiary is an option - but talk to your attorney to see if it is the right option in your circumstance.

• Life insurance. Handled through the beneficiary designation, not by retitling the policy.

• Vehicles and everyday accounts. Often left out for practical reasons and addressed through other mechanisms. If a vehicle is worth more than $100,000.00 though, your lawyer is likely going to have you title it under the name of your trust.

An Idaho Wrinkle Worth Knowing

Idaho is a community property state, which gives married couples a significant tax advantage: when one spouse dies, community property generally receives a full step-up in basis on both halves. A properly drafted trust preserves the community property character of assets transferred into it. A carelessly drafted one can inadvertently convert community property into separate property and cost the surviving spouse that benefit. This is not a place for a form downloaded online.

Funding Isn't a One-Time Event

Assets drift out of trusts over time. You refinance the house and the lender takes title out of the trust, and nobody puts it back. You open a new brokerage account and title it personally out of habit. You buy a rental property in Arizona and never think about which name is on the deed.

Every few years, and after any major purchase or refinance, it's worth pulling a list of what you own and checking whose name is on each item. It's an unglamorous exercise. It's also may be the difference between a trust that works and going through probate.

My law firm is currently offering free telephonic, electronic, or in-person consultations concerning probating estates or creating estate planning documents.

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Robert J. Green is an Elder Law, Trust, and Estate Attorney and the owner of Kootenai Law Group, PLLC in Coeur d’Alene. If you have questions about estate planning, probates, wills, trusts, or powers of attorney, contact Kootenai Law at 208-765-6555, [email protected], or visit www.KootenaiLaw.com.

This has been presented as general information and not as legal advice. Do not engage in legal decision-making without the advice of a competent attorney after discussion of your specific circumstances.