Living Trusts 101: Funding and Managing a Living Trust

What is a living trust?

A living trust is a legal document that allows its creator to: 

• Place assets in trust
• Name themselves as trustee
• Retain full power to manage those assets during their lifetime while ensuring they pass to beneficiaries without probate upon death

This means the trustee can continue to sell, gift, or otherwise handle the property just as she would have before creating the trust. The only difference is that transactions are made in the name of the trustee (Jane Doe, Trustee of XYZ Living Trust) rather than as the individual (Jane Doe).

When the creator of the trust dies, the assets in the trust are passed to a successor trustee of the creator's choice without involving probate (the court-directed process of distributing assets and paying debts of the deceased).

The assets may then be distributed to any named beneficiaries, but note that the assets in a living trust may still be subject to creditors and estate taxes above the $15 million federal exemption.

How is a living trust funded?

A living trust becomes valid only after the creator executes the necessary documents and then "funds" the trust by transferring assets into it. The specific process for moving assets into the trust by the "grantor" depends on the type of property involved. The two primary ways to move assets into a living trust are as follows.

Funding through ownership assignment

Where the grantor owns but does not hold legal title in assets, these can be moved into the trust by assigning ownership rights from the individual to the trustee. Common examples include:

• Works of art and antiques
• Jewelry
• Promissory notes
• Intellectual property
• Certain business interests

Funding through title changes

Items that the grantor holds the title to may be moved into the trust by changing the name of the owner from the individual to the trust. Common examples include:

• Real estate
• Bank accounts
• Investment and brokerage accounts
• Stock and bond certificates

How to transfer real estate into your trust

Real estate is often the most valuable asset people transfer into a living trust, and the process requires careful attention to detail:

• Prepare a new deed. You'll need to prepare a new deed. This would be typically a quitclaim deed or grant deed, depending on your state, that names the trust as the new owner. 
• Use the proper format. The deed should use the proper format: "Your Name, as Trustee of Name of the Living Trust dated [date]."
• Sign, notarize and record the deed. Once the deed is prepared, it must be signed, notarized, and recorded with the county recorder's office where the property is located. 
• Notify your mortgage lenders. Before completing the transfer, notify your mortgage lender to address any due-on-sale clause concerns (most lenders won't call a loan due for transfers to revocable trusts, but it's wise to confirm). 
• Contact your homeowner's insurance company. You should also contact your homeowner's insurance company to update your policy to reflect the trust's ownership.
• Check tax implications. Check whether your state has any property tax implications for trust transfers.

How to transfer bank and investment accounts into your trust

Most banks and brokerage firms have established procedures for retitling accounts into a trust. Contact your financial institution and request their trust account forms. 

• You'll typically need to bring a certified copy of your trust (or a certification of trust, which is a summary document) along with your identification.
• During the appointment with your banker or broker, you'll complete institution-specific paperwork to retitle the accounts. Some institutions issue new account numbers, while others simply change the registration on your existing accounts. 

The good news: Investment accounts can usually be retitled without liquidating your positions, meaning no taxable event occurs. 

• FDIC insurance coverage may change with trust accounts. Each named beneficiary may qualify for separate coverage, potentially increasing your total protection to $1,250,000 per owner per bank. 
• Some banks charge modest fees for trust accounts, so ask about any costs upfront.

Beneficiary designations vs. funding

The creator of the trust may choose to list the trust or trustee as a beneficiary for assets such as life insurance, pensions, and retirement accounts. However, this technically doesn’t move those assets into the trust, it simply directs where they go upon death.

What are the special considerations for retirement accounts?

Retirement accounts such as IRAs and 401(k)s require special handling. 

• Unlike other assets, these accounts should generally not be transferred directly into your living trust during your lifetime. 
• Moving a retirement account into a trust may lead to potentially devastating tax consequences such as triggering immediate income recognition on the entire account balance or eliminating the tax-deferred growth that makes these accounts valuable.

Roth IRAs have different considerations than traditional IRAs, since qualified Roth distributions are tax-free. The better approach is typically to name the trust as a beneficiary of your retirement accounts rather than transferring ownership. However, this requires careful planning to preserve "stretch IRA" benefits for your heirs, and it may not be optimal for everyone. 

• A surviving spouse can roll the account into their own IRA.
• Naming a spouse directly as beneficiary often provides better tax treatment than naming a trust.

To be clear, however, there is no obligation for the creator of the trust to change beneficiaries either. 

• Consult with a tax professional about the tax impact of distributing these types of assets to a trust upon your death. 
• Discuss required minimum distributions, see-through trust requirements, and estate tax considerations to determine the best approach for your situation.

Note as well that not all assets must, should, or even can be placed in a living trust. Accordingly, how a living trust is funded can vary greatly by individual circumstances, and seeking personalized legal advice is always a good idea.

What happens if you don't fund your living trust?

Failure to fund a trust is one of the most common estate planning mistakes, because creating a living trust document is only half the job. 

• Without funding, your trust is essentially a worthless document that won't accomplish its primary goal of avoiding probate. 
• Any assets that remain titled in your individual name (rather than in the name of your trust) will still need to pass through probate court when you die, which is exactly what most people create a living trust to avoid.

Many people assume that signing the trust document automatically protects their assets, but that's not how it works. If you own a home worth $500,000 and never transfer the deed to your trust, that home goes through probate, which could cost 3–7% of the estate's value regardless of what your trust document says.

This is where the pour-over will becomes important. A pour-over will acts as a safety net, directing any assets not already in your trust to "pour over" into it upon your death. However, those assets still go through probate first before reaching the trust, so the pour-over will should be a backup plan rather than your primary funding strategy.

Living trust funding checklist

Once your living trust is signed, aim to complete the funding process within 30 to 60 days. Use this checklist organized by asset type to ensure nothing falls through the cracks and remember to revisit it whenever you acquire new assets.

Real estate

• Prepare a new deed (quitclaim or grant deed) naming your trust as owner
• Have the deed notarized
• Record the deed with the county recorder's office
• Notify your mortgage lender of the transfer
• Update your homeowner's insurance policy to reflect trust ownership
• Check for any property tax implications in your state

Bank accounts

• Contact each bank to request trust account forms
• Bring your trust certification and identification to an appointment
• Complete paperwork to retitle checking, savings, and CD accounts
• Confirm online banking and bill pay access will continue

Investment and brokerage accounts

• Contact your broker or financial advisor
• Provide trust documentation and complete retitling forms
• Confirm accounts can be retitled without liquidating positions
• Update beneficiary designations if appropriate

Business interests

• Review operating agreements for any transfer restrictions
• Prepare assignment documents transferring your interest to the trust
• Update company records to reflect the trust as owner
• Consult with a business attorney if you have partners

Personal property

• Create an assignment document listing valuable items (art, jewelry, antiques, collectibles)
• Sign and date the assignment
• Store the assignment with your trust documents

Vehicles (optional, varies by state)

• Check your state's rules on transferring vehicle titles to trusts
• If applicable, complete DMV title transfer paperwork

Note: Many people leave vehicles out of their trust due to registration complexity

Items requiring professional assistance

• Retirement accounts (consult a tax professional before naming trust as beneficiary)
• Life insurance policies (review with your insurance agent and tax advisor)
• Annuities (discuss tax implications with a financial professional)

FAQs about funding and managing a living trust

Can I change or revoke my living trust after funding it?

Yes, a living trust is revocable, meaning you can change provisions, add or remove assets, make other modifications, and even revoke the trust entirely during your lifetime. This flexibility allows you to adapt your estate plan as your circumstances change.

Do I need a will if I have a living trust?

Yes, a pour-over will is generally recommended. It "catches" any assets not transferred into the trust and allows you to name a guardian for minor children.

Michelle Kaminsky, Esq., contributed to this article.