The Importance of Funding Your Trust

By Robert F. Angart, RIA, MBA, CPA (non-active)

In our financial planning practice when meeting with prospective clients, we often find that the client did not assign its assets to the trusts established by their estate attorney.

A method used by most attorneys today, to avoid probate and still retain maximum flexibility in disposing of your estate is to use a funded revocable living trust. A revocable "living trust" is a trust established during your lifetime. Under a living trust agreement, you, as the grantor, select a trustee (which you or your spouse) who holds and administers your property for your benefit during your lifetime pursuant to the terms of the agreement established by you. You have full control over these assets because you retain the right to amend or revoke this trust agreement at any time. Upon your death, the property held by the trustee passes to the beneficiaries you designate in your trust agreement. Because the trustee holds legal title to the assets, these assets need not be subject to probate.

An unfunded living trust will not avoid probate. Probate can be time-consuming, expensive and is available to the public. Only assets listed in the name of the trust will avoid probate.

When estate taxes are an important consideration, the use of funded revocable living trust is frequently the only way of avoiding probate and saving taxes at the same time. A trust takes advantage of each spouse's unified credit amount rather than passing all assets to the surviving spouse and getting only one credit amount upon the surviving spouse's death. By placing assets into the trust with a value equal to the Federal Estate Tax Credit Equivalent upon death of the first spouse, the trust passes the assets to the beneficiaries without having to pay taxes on them at the second death. Having the assets excluded from the estate of the second spouse to die will then save subsequent estate taxes. The surviving spouse can have "beneficial use" of the income and principle (as needed) during his or her lifetime.

Things a Revocable Living Trust can do if funded during your (grantor's) lifetime are:

• Avoid disclosure of personal information to the public.
• Administer your affairs if you become disabled or incompetent.
• Reduce estate taxes while providing for your surviving spouse.
• Control over when income or principal distributed to the beneficiaries. You have set the ages and purposes (health, education, support) for which a trustee may distribute income or principal to a beneficiary. For example, you may provide that a child receives one-half of the principal at age 25 and the balance at age 30. When an individual uses a simple will, the child receives their portion of the estate at majority, which is age 18 in Ohio.
• Protect assets from a beneficiary's creditors. 
• Protect both your spouse and children. A living trust can provide that assets pass to your children upon death of your surviving spouse. A living trust is useful in remarriage situations.

In summary, to have the revocable living trust avoid probate, it is necessary the client names the assets to the trust prior to their death. Title to all assets should be in the name of the Trustee under the Trust Agreement dated (date of execution) between Trustee and Grantor. Although there are inconveniences in transferring assets to your trust, we strongly believe these inconveniences are minor in comparison to the advantages of funding your trust. Angart & Co. will assist you in estate planning and make sure all you have transferred assets within your trust.