Unfunded Trusts: Pitfalls for the Unwary

Funding the Trust is an essential but often overlooked step towards avoiding a lengthy and expensive probate.  Creating a trust instrument, with all of the appropriate instructions, provisos and expressions of intent, is worse than useless if no step is taken to fund the trust by transferring assets into the trust.  Even when attorneys draft the trust instrument, they have been known to assume that clients will take this important step without explaining to them the need and importance.  The trust consequently remains unfunded.

An unfunded trust is similar to a bank account with no money in it, but it is worse than that because of the increased potential for disputes.   If the distribution specified in a trust is different than the distribution of non-trust assets, chances are good that a fight will occur among the variously affected beneficiaries. Sometimes disputes are avoided because the distribution is the same in or out of the trust.  For example, if the decedent also left a will that states that all assets are to be transferred to the trust, then the distribution is the same whether the asset is in the trust or in the probate estate.  But even in that case a lengthy and expensive probate will be required to transfer the assets into the trust, an unnecessary waste.

Fortunately, funding is relatively simple and painless.  Transferring real estate may take more effort, but most attorneys who draft the trust instrument will also transfer the real estate as part of the estate plan.  The next posting here will summarize the steps for funding a trust.

In the meantime, it pays to remember that once the ink is dry on the trust instrument, the work of setting up a living trust is not yet done.  Assets still need to be transferred to the trust in order for the trust to be effective.

Creative Commons License photo credit: Ken Wilcox.

This entry was posted in Estate Planning, Living Trusts, Probate, Trust Funding and tagged , , , , . Bookmark the permalink.