Let’s start with some jargon.
“Funding” a trust is what estate planning lawyers call the process of getting assets into a trust.
When we say something is in a trust, owned by a trust, or funded to a trust, we’re being a bit imprecise. Traditionally, trusts don’t own things: trustees, in their capacities as trustees, own the trust assets. Deeds and other documents transferring property into trusts actually (and should) name the trustee, as trustee, rather than just the trust, as the transferee/new owner.
The trustee is often named as follows: “Wendy Sample, Trustee of the Wendy Sample Trust, dated January 19, 2015.” Some lawyers use u/a/d (“under agreement dated”) or other abbreviations instead of the word “dated.” The date should be the date of the original trust agreement, not the date of any amendments or restatements.
Trustee as Owner, or Trustee as Beneficiary?
A trustee can be the owner or the beneficiary of an asset, or the trustee can be both owner and beneficiary.
Let’s use a life insurance policy as an example. A life insurance policy has an “owner” (the person who owes the premiums and can designate the beneficiary), an “insured” (the person who life the insurance is on), and a “beneficiary” (the person who receives money—the death benefit—upon the death of the insured). A trustee that owns a life insurance policy may be able to pay or choose not to pay premiums, cancel the policy, change the beneficiary, and otherwise manage the policy. Generally, only individuals can be insureds. In the alternative or in addition to being the owner, the trustee can be the beneficiary of the policy. If the trustee is only the beneficiary (and not the owner), the trustee, like any other life insurance policy beneficiary, will not have the ability to manage the policy: the trustee will simply receive the death benefit upon the insured’s death.
If the trustee is the owner of a life insurance policy, it may be necessary to make the trustee the beneficiary as well. A trustee has fiduciary duties to the trust’s beneficiaries, and those duties might prevent the trustee from maintaining an insurance policy that will benefit people other than the trust beneficiaries or that will treat the trust beneficiaries inconsistently with the terms of the trust.
It’s almost always preferable to have the trustee own an asset rather than merely being the beneficiary. When the trustee is the owner, the trustee can manage the asset if the person who created the trust becomes incapacitated. If an individual is the owner, the trustee will not have be able to manage the asset (though the individual’s agent under a durable power of attorney might be able to manage the asset). Sometimes, however, a trustee can’t be made the owner of an asset (many group life insurance policies), or it’s a terrible idea to make the trustee the owner (retirement accounts, generally). In those cases, it might make sense to make the trust the beneficiary. Note that there are a number of tax rules applicable to trusts as beneficiaries of retirement accounts—don’t try it without the assistance of your trusts and estates lawyer.
The Transfer Process
How does the trustee become the owner and/or the beneficiary of an asset? The process varies by assets (and financial institution). Generally, the process involves the following steps for each asset:
- Find out what’s required to transfer the particular asset. You may need to call the bank, financial institution, or your financial planner to get institution and asset-specific instructions and forms.
- Prepare the necessary documents. This many involve obtaining and filling out the forms you obtained from the institution or having your attorney prepare transfer documents for you. The forms are never as simple as they look.
- Submit the documents. The documents may need to be sent to the person or institution holding the assets, recorded with a government agency, or something else.
- Verify that the transfer was completed and done properly. Some of the people and institutions to whom you submit documents will return something to you verifying the transfer. Others, however, will not.
- Update the schedules that are attached to your trust after the signature page, if your trust has such schedules. Specifically list each transferred asset on the appropriate schedule.
Don’t Make a Mess
Incorrectly funding a trust can have serious negative consequences. It’s important to follow your attorney’s advice in funding your trust. There are a number of factors (like your state’s law, the provisions of your trust, and the nature of your assets) that can affect whether a particular asset belongs in your trust or how it should be transferred. The designation of trusts as beneficiaries of retirement accounts is particularly tricky.