Attorney James Jones: [00:00:00] Here’s the harsh truth. Just creating a revocable trust does not avoid probate. I’ve seen too many families show up in my office in beautifully bound trust documents in their hands only to discover its a legally powerless document because nothing was ever transferred into it. In today’s episode of Legacy Talk, we are unpacking the most overlooked step in estate planning, which is funding your trust.
If your house and accounts and investments are not properly titled in your trust, your estate could still end up in court. So let’s make sure that your trust actually works when your family needs it most.
You are listening to the legacy talk podcast hosted by James A. Jones, attorney at law and founder of sound legacy law, PLLC in Tacoma. Attorney Jones is here to talk about how to best protect your family assets and well, pulling stories from his more than 20 years of helping families and business owners protect [00:01:00] their assets, create their estate plans, preserve their wealth and plan for the future.
Nobody wants to think about estate planning, but life has a way of sneaking up on you and. And at any moment, something unexpected could happen that will leave you regretting not having acted sooner. So join attorney James A. Jones in the Legacy Talk podcast and together learn how to plan for your future today and have peace of mind tomorrow.
Attorney James Jones: Welcome to Legacy Talk. I am your host, James Jones. On today’s show we’re talking about you created a trust.
Now what? What funding matters more than you think. And the story for this week is one that I’ve told before and other episodes of this podcast, though, I’ve never done one specifically about funding a trust. We talk about it a lot because it’s a way to avoid probate, right? If you do a trust and you fund it properly, no probate, okay?
That’s the benefit. [00:02:00] So I had this client whose father was dying of cancer. He was a widower who had a lot of assets. He had a house, he had a lot of different cars, classic cars, and various levels of completion. Some very well completed, some in his backyard. Ready to be given some more love. He had investment accounts, he had bank accounts.
My client wanted to get things in order before her father passed and decided to do a revocable trust for him. Now, the trust itself was a very good idea, and as we’ve talked about many times on this podcast, the revocable trust is often the best choice for your estate plan. But the problem was that she did the trust herself.
Through an online program. She had a document, but nothing else. She hadn’t transferred anything into the trust and thought that the will that they gave her would do the job when he passed, well, she was right. The will did transfer all of his assets into the trust, but she didn’t realize that in order for the will to transfer all of his [00:03:00] assets into the trust that she would have to open probate the very thing that she thought she was avoiding by creating the trust.
Okay, so today we’re going to emphasize this story, right? Today we’re talking about this and why funding a trust matters so that this doesn’t happen to you. Okay, so why? why does it matter? First off, what does funding a trust really mean? James, funding? What are you talking about? Well, I say it all the time and I’m not sure.
Maybe my clients do think that. Maybe they think. What’s this guy talking about? Funding a trust. Anyway, funding is not necessarily about money, but it’s about how your assets are titled or how they’re owned. The trust must own or be a beneficiary of your assets in order for it to do its job. Otherwise, the trust doesn’t control your assets, right?
So if you don’t title your assets into the trust. [00:04:00] You title your house into a trust or real estate into the trust you title bank accounts into the trust investment accounts. If those are not titled in the trust doesn’t control them, right? They’re your assets still.
So, James, what happens if you don’t fund your trust?
Well, you know the answer to this, we just gave it to you, right? If you don’t fund your trust properly, you are probably going to end up in probate. Think of a trust like this, like a suitcase, right? I. Yeah, if you don’t put anything inside your suitcase, which is its sole purpose, is to hold your stuff, it doesn’t help you, right?
So if you get a trust agreement or trust document and you put it on your shelf and you don’t do any titling of assets into the trust, like funding the trust, you don’t put your house in it. You don’t put your bank accounts in it. It’s just gonna sit there on your shelf. It’s not gonna do anything for you.
So what do we transfer into the trust? What needs to be transferred into the trust? The first thing that we wanna make sure is in the trust is real [00:05:00] estate, right? Do you have a house? Do you have investment properties or rental properties, or vacation properties, right? Do you have properties in other states?
We wanna make sure that your real estate is in the trust. And the way that we get real estate into a trust is through a deed. And so typically we do a quick claim deed in Washington. You can do a statutory warranty deed if you want. You do a bargain and sale deed, it doesn’t matter what kind of deed, typically, I typically do quick claim deeds.
They’re simpler to deal with, and we deed the property from you as an individual to yourself as trustee of the trust if it’s your trust. You also want to transfer your bank accounts, and there’s a couple ways to do this, but I usually recommend retitling the account in the trust so that the trust is the owner of the account and you’re managing that account as trustee of the trust.
Okay? You could also do it on like a pay with a payable on death designation or a beneficiary designation on the account. But the reason that I dis favor that [00:06:00] and I do favor retitling, is because if you are naming your trust as beneficiary, it might take several days or weeks. For that beneficiary designation to kick in, it’s not an immediate, whereas if your trust is titled as owner of an account, your successor trustee, who’s the person that takes control when you’re gone, can basically step right in to your shoes and manage the trust according to the terms of the trust without waiting for the bank to fund the transfer, write a check, or anything like that.
You also wanna make sure that your brokerage investment accounts are in the trust. That’s like stock accounts CDs, money market, that kind of thing. General stock can be in the trust too, if you hold like just certificates through computer share or something like that. Those assets, stock accounts, brokerage accounts, need to be titled in the trust name.
You also want a title, in most cases, your business interest in the trust. Certain things can’t be owned by a [00:07:00] trust business wise. But in many cases, a revocable living trust can hold almost anything you want it to. It can hold LLCs, it can hold S-corp as long as it has key provisions so that it’s allowed to it can hold general C-Corp stock as well.
And doing that allows those interests to transfer under your estate plan rather than having to go to court and fight about ownership when you’re gone. Another thing that you want to transfer into the trust is your promissory notes, any loans that you might have made. And the other thing that gets transferred into your trust, and this one is something you don’t have to do anything about, is your non-Title tangible personal property.
That means like jewelry and heirlooms, antiques, furniture, artwork. Oftentimes that doesn’t have to be put into the trust specifically because it’s non-Title. So that’s sort of put into the trust when you sign the trust, and there’s a specific document that we add, any non-titled tangible personal property into the trust without any, [00:08:00] you know, other documentation.
So, okay, well, what about other assets? What Some assets shouldn’t go into your trust. Okay. The primary asset that doesn’t go into your trust is your retirement accounts. That’s like an IRA or a 401 (k), 403 (b). And the reason why we don’t put retirement accounts into the trust is because if you do, well, first of all, IRA accounts 401 (k).
401 (k) are through an employer, so they’re set up an employee employer relationship. An IRA is a 401 (k). Oftentimes that rolled into a personal individual retirement account. An IRA has to be owned by an individual. It can’t be owned by a trust. Okay? In most cases. And so we don’t transfer the title if it wasn’t set up that way.
If we don’t transfer the title to the IRA into the trust, because if you do, you’re going to have to recognize all the income that you’re deferring by having your asset in a individual retirement account. Okay? So what we [00:09:00] wanna make sure that we do on those is to make sure the beneficiaries are correct.
Sometimes we name the trust as a beneficiary on an IRA. Sometimes if it’s a married situation, we name the surviving spouse. ’cause that gives them more flexibility as far as extending it. If we name the trust, there’s a 10 year window where they have to pull out the money.
Life insurance is something that you also don’t necessarily need to name into your trust. But usually I recommend naming the trust as the beneficiary of life insurance. That way all those funds go into the trust and they’re distributed under the terms of your trust plan, even if you’re married, right?
We make sure that those life insurance proceeds go into the trust in order for your family and the beneficiaries of the trust to benefit from those proceeds. Another thing that we don’t usually transfer into a trust or vehicles, unless they’re high value vehicles. If you have assets over a hundred thousand dollars not in the trust, then technically would possibly have to do a probate.[00:10:00]
If you have high value vehicles, we’d probably put ’em into the trust. Otherwise, if they’re just regular daily drivers under a hundred thousand dollars, we usually leave them out. And in Washington it’s really easy to change title to a car. And so even without a. You know, without a probate, oftentimes surprisingly easy, shockingly, sometimes easy to do title transfers on vehicles in Washington.
So what happens if you’re in a married situation and you create a trust? Right? So when you create a trust with community assets, those assets stay community. When you put separate property assets into a trust. Technically they maintain their separate property status, but it can be muddy or it’s difficult.
It’s difficult in those situations. So typically we put community assets into a trust. And if you’re trying to maintain separate property, we don’t usually put separate property in the [00:11:00] same trust as community property, just for simplicity’s sake. And another thing that Washington does and many states do, but not every state is when you’re transferring real estate into the trust, there’s an exemption for the real estate, excise tax.
And so when you’re transferring into a trust, which is basically like a, I’m transferring it to my myself on paper, that’s really what it is. They don’t tax you on that transfer. Like if you sold the house, you get taxed.
But if you’re transferring it into a revocable trust that you control, they don’t typically tax that. So. Okay, so what about pour over wills and existing wills? What about them, James? So our friend and my client in the first story of this episode, relied on her poor, dad’s poor over will to fund the trust.
Poor over wills are safety nets and safety nets only. You do not want to rely on a pour over will. Why? Well, you know the answer [00:12:00] already because if you use a will to transfer assets anywhere. The way that the will is used is by going to court and getting a judge to sign off on an executor and giving that executor the authority to access and administer the assets in the trust and that will it really, its job is to ma basically sync with the trust, but it only catches assets that were missed, right?
It doesn’t touch anything with the bene beneficiary designation. It doesn’t touch anything that’s already in the trust. Okay. Which leads us to beneficiary designations. You can use beneficiary designations to avoid probate, but if you use payable on death or transfer on death designations on like bank accounts, for example, that could be in conflict with what your trust plan was set out to do.
Right? So if you say, I want everything to go to my spouse when I die. And you have a payable on death account that gives those funds to your kids or your friend or brother or whatever, then that would, you know, con conflict with [00:13:00] your trust plan. And so typically we want everything to go according to the same plan is the trust.
And so making sure that those things are consistent and not an issue is a big step to making your trust function properly. And now a little. Blurb about why do you wanna work with a professional? Working with professionals is different than working with a computer or someone that doesn’t really know what they’re doing when dealing with trust transfers, right?
Particularly deeds and titles to assets. You wanna have someone help you who’s done it before, right? Deeding property is not difficult, especially if you do it all the time. But if you don’t do it all the time, it’s can be complicated and you could screw it up and that property doesn’t get put into the trust.
Same thing is true with financial assets. If those are not titled properly, then you could have a problem and those assets are not in the trust. Okay? So you want to have the reassurance that happens. You wanna follow [00:14:00] up and have verification that those things happened. And working with an experienced estate planning attorney can really help that because we deal with this all the time, right? We deal with funding the trust all the time.
And I’ve refined and refined our process so that we really make it so that our clients know, Hey, this is important. Read the documents. We check in with them, we give them checklists. You know, we give them all these things to use to change their accounts, change their assets.
‘ cause we wanna make sure that trust is good. We do probate here, but we’d rather do just trusts, right? And so having a funded trust means we don’t have to do probate for that case. Okay, so finally, this trust, like we said, is really only as strong as the assets it holds. Creating the trust in the first place is a powerful step, but without proper funding, it’s like locking your front door and leaving the windows wide open, right?
You’ve created a trust or you’re thinking about it. The next step is just as important, which is making sure that your assets are [00:15:00] properly titled in the name of the trust. Okay,
our next episode is going to branch off from revocable trust a little bit. We’ll talk about the difference between revocable trust and irrevocable trust and when it might use, make sense to use one or both into your estate plan. So a lot of the times we’ll use both, you know. You can have advantages through irrevocable trust, through asset protection, medicaid planning.
There’s some tax strategies to use irrevocable trusts. So don’t miss next week’s episode. Revocable versus irrevocable trust. What’s the difference? You know, if that’s what we end up calling it, we’ll see. Anyway, thanks for listening to today’s episode of Legacy Talk. If you like today’s episode and would like to learn more, please like and subscribe for more great content.
I’ve been your host, James Jones, to your legacy.
Thank you for listening to the Legacy Talk podcast by attorney James A. Jones. If you found [00:16:00] today’s episode helpful, we ask that you like and follow us on all major platforms so you don’t miss out on the latest episode. If you have questions for Attorney Jones, reach out at info@joneslegacylaw.com or visit our website at jones legacy law com.
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