This article was previously published in the Naples Daily News Estate Planning Council Supplement on March 3, 2024
Imagine your revocable trust as an empty box. Funding is the equivalent of placing your valuable assets inside the box to safeguard them for the future. This is achieved by renaming (retitling) ownership of an asset from yourself to the box's manager (trustee). In certain situations, not funding your trust can be as crucial as funding it.
What is the right time to fund your trust(s)?
As an estate planning client, you can expect your attorney to discuss funding when you sign your new or updated Florida trust documents. Many estate planning practitioners advise that you must fund your trust upon its creation and continually as you acquire new assets. And it makes sense. Why have a trust if you're not going to fund it? However, this sentiment is far from true.
Make sure to evaluate closely whether to fund your trust, as the decision can significantly impact your estate planning strategy. In some cases, delaying trust funding can serve as an asset protection and wealth preservation tool, especially when you are in a relationship where you want your surviving spouse to have full discretion over the assets.
Let's explore the reasons for and against funding your trust and how your specific circumstances play a crucial role in this decision.
Reasons to Delay Trust Funding (Cons for Funding)
1. Asset Protection: If you are married, and your goals align with your spouse's, or you are comfortable with your spouse deciding how to distribute assets upon their death (also referred to as second death), delaying trust funding may make sense. Keeping assets in joint names as tenants by the entireties in Florida can offer protection from creditors in case of unforeseen liabilities, such as a car accident, lawsuit, or bankruptcy. Placing these assets into your revocable trust while you are alive may expose them to creditors.
2. Administrative Burden: If you fund your revocable trust and then pass away, your surviving beneficiary will be responsible for administering the trust annually. If you don't mind your survivor having complete control, you may prefer to have the assets pass outside of the trust directly to the survivor by operation of law through joint tenancy or beneficiary designation.
Reasons to Fund Your Trust (Pros for Funding)
1. Minimizing Probate: If you are single, carefully funding your trust(s) now or selecting beneficiary designations can help minimize the probate process and ensure your assets pass to your intended trust beneficiaries. This can streamline the transfer of assets and reduce administrative hassles for your heirs.
2. Second Marriage or Alternative Relationship: If you are in a second marriage or alternative relationship and have children or heirs different from your significant other's heirs, it's advisable to fund your trust either now or through beneficiary designations. This ensures that your assets pass to your intended trust beneficiaries, minimizing the risk of disputes or unintended beneficiaries.
3. Identical Goals with Spouse: If you are married and share identical goals and desires with your spouse regarding the distribution of your assets, funding your trust(s) now may be less essential. In such cases, holding assets as "tenants by the entireties" in Florida can offer certain advantages for asset preservation.
Conclusion
The drafting of your trust is just one part of the estate plan. Understanding the complexity of the funding question is the art of estate planning, as it entails making choices that can significantly affect how your wealth is protected throughout your lifetime.
Remember that tax issues and considerations related to irrevocable trusts are beyond the scope of this article, and it's advised to discuss step-up in basis planning and irrevocable trust advantages with your estate planning advisors for a comprehensive strategy.