A couple of estate planning FAQs our clients ask are about trusts. How can a revocable living trust benefit families and how do you properly fund them?
To answer the first question, families will typically set up a trust to put guardrails around their beneficiaries' ability to spend the assets. This is common when there are children or heirs you don't want to spend all the money at once. A trust puts certain spending guidelines in place.
Another reason to set up a trust is to avoid probate. If after-tax accounts like joint bank accounts or individual investment accounts are not placed in a trust or do not have a Transfer on Death designation the accounts will go through probate upon the owner's passing. The time and cost of probate varies from state to state but it should be avoided at all costs to prevent furthering your family's stress, pain, and heartache.
This leads to the question...How do you properly fund a trust?
You can fund a trust from two buckets of assets: Retirement Accounts and After-Tax Assets.
🪣 #1 Retirement Accounts (such as ROTH IRAs, 401(k)s, SEP IRAs, and 403Bs): You can avoid triggering a tax event while funding your trust by updating your account beneficiaries, naming the trust as one.
This can be done in one of two ways. Update the account beneficiary to be 100% the spouse and the trust as contingent beneficiary. This is common in most marriages so when the first spouse passes away the assets go into the name of the living spouse and after the second spouse passes the assets go into the trust.
The second way is to name the primary beneficiary as the trust. Upon that person's passing the retirement accounts go directly into the trust. Then it flows through based on the terms of the trust. This is more common for single people or blended families.
🪣 #2 After-Tax Assets (homes, joint accounts, and individual investment accounts): You can retitle the accounts into a trust or add a TOD with the trust listed as a beneficiary.
If you retitle the accounts into a trust it now owns the assets. You and your spouse can become co-trustees to retain control.
If you choose to add a TOD (Transfer on Death), you simply add beneficiaries to an investment account like an IRA. You can add the TOD and make your spouse the beneficiary, the trust the contingent, or make the trust the primary beneficiary.
If you are interested in using a Trust to protect your family, I'd be more than happy to look at your situation and discuss the best way to set up and fund your trust!
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