Funding Revocable Trusts – Part I

Perhaps the most complicated, but fundamental, estate planning aspect for most clients is funding their Revocable Trust. Often times a Revocable Trust is established, primarily to avoid probate. However, if assets are not transferred into the Revocable Trust probate is not avoided.

Probate is the process whereby the county where you live at your death supervises how your assets are collected and ultimately distributed. The process typically requires the Executor named in your Will to qualify at the court house, file an initial inventory, and then prepare periodic accountings. After a year or so, the process is concluded, but not without much time, expense and hassle. For every Executor who says “probate was not a problem,” there are nine Executors who say the experience was terrible. Thus, a fundamental goal of estate planning is to avoid probate.

Which takes us back to funding your Revocable Trust. Assets need to be transferred into the Trust prior to death to avoid probate. If assets pass to the Revocable Trust upon your death from your “pour over” Will – a companion estate document to the Revocable Trust – assets go through probate. Thus, probate is only avoided if the Revocable Trust is created and funded.

When discussing probate avoidance and transferring assets upon death, it is important to zero in on precisely how title to assets passes upon death. The answer is it depends on whether the assets have a beneficiary designation or only title. Examples of assets that have beneficiary designations are retirement plan assets, such as IRA’s, 401(k)’s, and government pension plans. Other examples include life insurance, annuities, and even now brokerage accounts and bank accounts that have “payable on death” or “transfer on death” designations. If an asset has a beneficiary designation, it passes free of probate. With a few exceptions, married couples will want to list the surviving spouse as the primary beneficiary and the Revocable Trust as the contingent beneficiary.

Assets that do not have beneficiary designations pass upon death by title. If there is not a joint owner (and no beneficiary designation), the asset would pass through probate. Thus, those solely owned assets should be transferred into your Revocable Trust.

If the asset is jointly titled with a survivorship right, the asset passes directly to the surviving spouse. For married couples, joint ownership with a survivorship right is often “tenants by the entirety,” which also provides asset protection. Thus, for married couples often assets are left titled jointly during both of their lifetimes. However, at the first death the surviving spouse would want to fund his or her Revocable Trust. Also, in the event of a simultaneous death, assets would pass through probate. So whether or not you are married, you may want to transfer title to assets to your Revocable Trust during your lifetime to avoid probate upon death.